* Indian Financial CDS - Indian banks are beginning to show some signs of serious stress. All three major banks have crossed the "Lehman Line" (+300 bps) and are showing no sign of retreat. Last week, they rose a further 49-69 bps, putting them all north of 350 bps currently.
* High Yield – Rates rose another 9 bps last week, ending the week at 6.55% versus 6.46% the prior week. After troughing briefly on July 22nd at 5.91%, rates have been steadily climbing since. Our firm's view on rates is that they'll continue to grind higher making higher highs and higher lows. Historically, we've seen Financials far more correlated with high yield than they are currently. This is a good sign, as the market is differentiating systemic credit risk from risk of rising rates.
Financial Risk Monitor Summary
• Short-term (WoW): Negative / 1 of 13 improved / 5 out of 13 worsened / 7 of 13 unchanged
• Intermediate-term (WoW): Positive / 5 of 13 improved / 3 out of 13 worsened / 5 of 13 unchanged
• Long-term (WoW): Negative / 3 of 13 improved / 3 out of 13 worsened / 7 of 13 unchanged
1. U.S. Financial CDS - Morgan Stanley widened 8 bps last week, making it the ugly duckling. Most of the other large cap names were uneventful. Insurers were similarly little changed. MGIC saw its swaps widen by 33 bps to 449 bps, though Radian tightened by 2 bps. Overall, swaps widened for 19 out of 27 domestic financial institutions, though the average and median change WoW was +4 and +1 bps, respectively.
Tightened the most WoW: BAC, WFC, GS
Widened the most WoW: MMC, AXP, GNW
Tightened the most WoW: MET, PRU, AIG
Widened the most MoM: MBI, AGO, AXP
2. European Financial CDS - Swaps were mostly wider last week on EU financials. One callout includes Sberbank of Russia backing up another 22 bps to 261 bps, now wider by 54 bps MoM. We continue to find this puzzling in light of the ongoing rise in crude oil. However, a possible explanation is the growing tension in the Syria/Middle East conflict.
3. Asian Financial CDS - Indian banks are beginning to show some signs of serious stress. All three major banks have crossed the "Lehman Line" (+300 bps) and are showing no sign of retreat. Last week, they rose a further 49-69 bps, putting them all north of 350 bps. China and Japan were quiet last week.
4. Sovereign CDS – Portugal was the only sovereign mover of note last week, widening 35 bps to 471 bps. Elsewhere around the world, swaps ranged from 1 bp tighter (Ireland) to 3 bps wider (Japan).
5. High Yield (YTM) Monitor – High Yield rates rose another 9 bps last week, ending the week at 6.55% versus 6.46% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 4.0 points last week, ending at 1800.
7. TED Spread Monitor – The TED spread rose 1.1 basis points last week, ending the week at 23.4 bps this week versus last week’s print of 22.3 bps.
8. CRB Commodity Price Index – The CRB index rose 0.3%, ending the week at 291 versus 290 the prior week. As compared with the prior month, commodity prices have increased 1.4% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.
9. Euribor-OIS Spread – The Euribor-OIS spread was again unchanged last week at 12 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk.
10. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 15 basis points last week, ending the week at 3.36% versus last week’s print of 3.21%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.
11. Markit MCDX Index Monitor – Last week spreads widened 8 bps, ending the week at 96 bps versus 88 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1.
12. Chinese Steel – Steel prices in China rose 1.2% last week, or 42 yuan/ton, to 3610 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.
13. 2-10 Spread – Last week the 2-10 spread tightened to 244 bps, -5 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.
14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.9% upside to TRADE resistance and 2.1% downside to TREND support.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT