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Takeaway: Most of last week was uneventful from a risk monitoring standpoint, but India's banking system continues to slide.

Key Takeaways:

 

* Indian Financial CDS - Indian financials continue to deteriorate. Last week, 2 of 3 major Indian banks widened. ICICI was wider by 6 bps, IDB widened by 14 bps and State Bank of India tightened by 3 bps. Both ICICI and IDB are now knocking on the door of 400 bps (395 bps apiece), while State Bank is at 365 bps. This is the one area of geographical meltdown globally from a systemic banking standpoint.

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 3 of 13 improved / 5 out of 13 worsened / 5 of 13 unchanged

 • Intermediate-term(WoW): Positive / 5 of 13 improved / 4 out of 13 worsened / 4 of 13 unchanged

 • Long-term(WoW): Negative / 2 of 13 improved / 4 out of 13 worsened / 7 of 13 unchanged

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1. U.S. Financial CDS -  Overall, swaps for US financials were essentially unchanged, tightening by 2 bps on average. Large caps were mixed with C and MS tighter, but JPM wider. Specialty Finance swaps were tighter among both cards and MIs. Insurance swaps were flat to tighter. Overall, swaps tightened for 17 out of 27 domestic financial institutions.

Tightened the most WoW: AXP, C, MBI

Widened the most WoW: JPM, GS, PRU

Tightened the most WoW: C, COF, MET

Widened the most MoM: MBI, JPM, TRV

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2. European Financial CDS - European financial swaps were wider almost across the board last week, though only by a small amount. The average and median widening was 3 and 5 bps, respectively. Tighteners included Sberbank and Greek banks.

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3. Asian Financial CDS - Indian financials continue to deteriorate. Last week, 2 of 3 major Indian banks widened. ICICI was wider by 6 bps, IDB widened by 14 bps and State Bank of India tightened by 3 bps. Both ICICI and IDB are now knocking on the door of 400 bps (395 bps apiece), while State Bank is at 365 bps. Chinese and Japanese financials were both nominally tighter.

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4. Sovereign CDS – Italy, Spain and Portugal all widened on the week, by 6, 7 and 41 bps, respectively. Ireland and Japan were also wider by 6 and 2 bps, respectively. The US, Germany and France were all unch'd. 

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5. High Yield (YTM) Monitor – High Yield rates fell 7.4 bps last week, ending the week at 6.48% versus 6.55% the prior week.

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6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 2.0 points last week, ending at 1802.

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7. TED Spread Monitor – The TED spread rose 0.3 basis points last week, ending the week at 23.7 bps this week versus last week’s print of 23.41 bps.

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8. CRB Commodity Price Index – The CRB index rose 1.0%, ending the week at 291 versus 288 the prior week. As compared with the prior month, commodity prices have increased 2.1% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

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9. Euribor-OIS Spread – The Euribor-OIS spread was unchanged last week at 13 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. 

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10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 31 basis points last week, ending the week at 2.96% versus last week’s print of 3.27%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

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11. Markit MCDX Index Monitor – Last week spreads widened 10 bps, ending the week at 106 bps versus 96 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.

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12. Chinese Steel – Steel prices in China fell 0.3% last week, or 12 yuan/ton, to 3598 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

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13. 2-10 Spread – Last week the 2-10 spread tightened to 238 bps, -5 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

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14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.5% upside to TRADE resistance of $19.74 and 1.0% downside to TREND support of $19.24.

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Joshua Steiner, CFA

Jonathan Casteleyn, CFA, CMT