Key Takeaways:
* U.S. Financial CDS - Domestic financial swaps were notably tighter last week, with some of the largest improvements coming from the mortgage insurers (MTG: -21 bps, RDN: -20 bps) as well as AXP (-4 bps), MS (-7 bps) and GS (-4 bps). Both AGO and MBI saw swaps widen, adding to the trend we've seen M/M. Overall, swaps tightened for 20 out of 27 domestic financial institutions.
* Sovereign CDS – Portuguese sovereign swaps should be monitored closely as they have risen 95 bps in the past month, to 533 bps. In the last week, Italian, Spanish and Portuguese sovereign swaps widened by 6, 2 and 22 bps, respectively. Meanwhile, French, Irish and Japanese swaps tightened 1, 3 and 3 bps, respectively. The US and Germany were unchanged. All the countries we track now have swaps higher on a M/M basis.
* Asian Financial CDS - Indian banks finally cool off. We've been flagging the rising risk in the Indian banking system for several weeks now. This past week, Indian banks finally saw their swaps decline, albeit nominally relative to the magnitude of increase over the intermediate term. Swaps were also notably tighter in China with two out of three banks seeing their swaps decline by more than 10 bps. Japanese financials were largely unchanged on the week.
Financial Risk Monitor Summary
• Short-term(WoW): Positive / 4 of 13 improved / 1 out of 13 worsened / 8 of 13 unchanged
• Intermediate-term(WoW): Negative / 5 of 13 improved / 5 out of 13 worsened / 3 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 - Domestic financial swaps were notably tighter last week, with some of the largest improvements coming from the mortgage insurers (MTG: -21 bps, RDN: -20 bps) as well as AXP (-4 bps), MS (-7 bps) and GS (-4 bps). Both AGO and MBI saw swaps widen, adding to the trend we've seen M/M. Swaps tightened for 20 out of 27 domestic financial institutions.
Tightened the most WoW: AXP, RDN, MS
Widened the most WoW: MBI, AGO, ACE
Tightened the most WoW: AXP, RDN, MET
Widened the most MoM: MBI, JPM, AGO
2. European Financial CDS - European bank swaps were broadly tighter again last week, declining by an average and median of 5 bps. One of the few outliers was Banco Espirito Santo of Portugal where swaps rose 10 bps W/W and are up 69 bps M/M, currently at 569 bps. This reflects the overall deterioration in the Portuguese sovereign market.
3. Asian Financial CDS - Indian banks finally cool off. We've been flagging the rising risk in the Indian banking system for several weeks now. This past week, Indian banks finally saw their swaps decline, albeit nominally relative to the magnitude of increase over the intermediate term. Swaps were also notably tighter in China with two out of three banks seeing their swaps decline by more than 10 bps. Japanese financials were largely unchanged on the week.
4. Sovereign CDS – Portuguese sovereign swaps should be monitored closely as they have risen 95 bps in the past month, to 533 bps. In the last week, Italian, Spanish and Portuguese sovereign swaps widened by 6, 2 and 22 bps, respectively. Meanwhile, French, Irish and Japanese swaps tightened 1, 3 and 3 bps, respectively. The US and Germany were unchanged. All the countries we track now have swaps higher on a M/M basis.
5. High Yield (YTM) Monitor – High Yield rates rose 8.7 bps last week, ending the week at 6.57% versus 6.48% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 2.0 points last week, ending at 1804.
7. TED Spread Monitor – The TED spread rose 0.2 basis points last week, ending the week at 23.8 bps this week versus last week’s print of 23.65 bps.
8. CRB Commodity Price Index – The CRB index fell -0.8%, ending the week at 293 versus 296 the prior week. As compared with the prior month, commodity prices have increased 3.5% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.
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.
10. Chinese Interbank Rate (Shifon Index) – The Shifon Index fell 14 basis points last week, ending the week at 2.89% versus last week’s print of 3.03%. 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 2 bps, ending the week at 104 bps versus 106 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 fell 0.1% last week, or 4 yuan/ton, to 3594 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 widened to 248 bps, 9 bps wider 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 1.0% upside to TRADE resistance and 0.8% downside to TRADE support.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT