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Takeaway: Portugal (sovereign credit risk) continues to go the wrong way while the rest of the world remains stable.

Key Takeaways:

* U.S. Financial CDS -  Assured (AGO) and MBIA (MBI) widened sharply last week, tacking on 69 and 107 bps, respectively, to their 5-yr credit default swaps. Elsewhere in the Financials complex, however, just about everything was green. The median US Financial tightened 1 bp last week .Overall, swaps tightened for 20 out of 27 domestic financial institutions. From an equity standpoint, MS and GS saw the best returns last week, rising 4.9% and 4.7%, respectively.

European Financial CDS - Europe's financial system continues to heal. Swaps tightened notably last week with an average decline of 9 bps and a median decline of 10 bps. Spanish, Italian, French and German banks all saw swaps tighten sharply. 

* Asian Financial CDS - Risk appears to be diminishing across Asia, as Indian bank swaps are finally moving lower. Chinese bank swaps also moved sharply lower this past week. We're a bit surprised to see the divergence between Indian bank swaps and equities.

* Sovereign CDS – Portuguese swaps remain one of the few areas globally that continues to show steady signs of deterioration. Portugal's swaps rose another 24 bps last week, bringing the spread to 557 bps. They were higher by 24 bps last week and are now up 122 bps vs the prior month. Elsewhere around the world, swaps were largely uneventful with the next largest move coming from Italy at +6 bps W/W. 

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 / 3 of 13 improved / 3 out of 13 worsened / 7 of 13 unchanged

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

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1. U.S. Financial CDS -  Assured (AGO) and MBIA (MBI) widened sharply last week, tacking on 69 and 107 bps, respectively, to their 5-yr credit default swaps. Elsewhere in the Financials complex, however, just about everything was green. The median US Financial tightened 1 bp last week .Overall, swaps tightened for 20 out of 27 domestic financial institutions. From an equity standpoint, MS and GS saw the best returns last week, rising 4.9% and 4.7%, respectively.

Tightened the most WoW: C, COF, SLM

Widened the most WoW: MBI, AGO, MMC

Tightened the most WoW: COF, MET, AXP

Widened the most MoM: MBI, AGO, MMC

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2. European Financial CDS - Europe's financial system continues to heal. Swaps tightened notably last week with an average decline of 9 bps and a median decline of 10 bps. Spanish, Italian, French and German banks all saw swaps tighten sharply. 

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3. Asian Financial CDS - Risk appears to be diminishing across Asia, as Indian bank swaps are finally moving lower. Chinese bank swaps also moved sharply lower this past week. We're a bit surprised to see the divergence between Indian bank swaps and equities.

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4. Sovereign CDS – Portuguese swaps remain one of the few areas globally that continues to show steady signs of deterioration. Portugal's swaps rose another 24 bps last week, bringing the spread to 557 bps. They were higher by 24 bps last week and are now up 122 bps vs the prior month. Elsewhere around the world, swaps were largely uneventful with the next largest move coming from Italy at +6 bps W/W. 

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5. High Yield (YTM) Monitor – High Yield rates fell 11 bps last week, ending the week at 6.46% versus 6.57% the prior week.

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6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 4.0 points last week, ending at 1808.

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7. TED Spread Monitor – The TED spread rose 0.1 basis points last week, ending the week at 23.9 bps this week versus last week’s print of 23.84 bps.

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8. CRB Commodity Price Index – The CRB index rose 0.2%, ending the week essentially unchanged at 291. As compared with the prior month, commodity prices have decreased -0.5% 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 at 13 bps last week. 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 rose 2 basis points last week, ending the week at 2.97% versus last week’s print of 2.95%. 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 94 bps versus 104 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 0.9% last week, or 33 yuan/ton, to 3561 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 245 bps, -2 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 1.8% upside to TRADE resistance and 1.0% downside to TRADE support.

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Joshua Steiner, CFA

Jonathan Casteleyn, CFA, CMT