• It's Here!

    Etf Pro

    Get the big financial market moves right, bullish or bearish with Hedgeye’s ETF Pro.

  • It's Coming...

    MARKET EDGES

    Identify global risks and opportunities with essential macro intel using Hedgeye’s Market Edges.

Takeaway: US sovereign swaps continue to spike, rising another 10 bps last week. Meanwhile, EU sovereign swaps & EU bank swaps continue to tighten.

Key Takeaways:

We're watching for interbank risk measures to rise as an indicator that the markets are becoming genuinely nervous. TED Spread, Euribor-OIS and Shifon are the three we watch actively. As of Friday's close, none of them were showing any signs of a breakdown.

* Sovereign CDS – The real trade here remains shorting the US and being long the PIIGS. US Swaps widened 10 bps (+31%) again last week bringing the level to 41 bps. The M/M change has risen to +19 bps (+85%). For reference, US swaps peaked at 64 bps in late-July 2011, the last time the US Govt budget process was in total dysfunction. Meanwhile, Italian, Spanish, Portguese and Irish swaps were all notably tighter on the week. 

* European Financial CDS - EU bank swaps tightened further on the week. Spanish, Italian and French banks all came in notably. On average, swaps tightened by 10 bps last week and are lower by 27 bps, on average, vs the prior month. One of the few EU Financials that posted deterioration was Sberbank of Russia, which saw swaps widen by 14 bps WoW.

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 4 of 13 improved / 1 out of 13 worsened / 8 of 13 unchanged

 • Intermediate-term(WoW): Positive / 8 of 13 improved / 3 out of 13 worsened / 2 of 13 unchanged

 • Long-term(WoW): Negative / 1 of 13 improved / 4 out of 13 worsened / 8 of 13 unchanged

MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 15

1. U.S. Financial CDS -  The biggest mover on the week was GS with swaps widening by +8 bps. On the other end of the spectrum, MGIC saw its swaps tighten by 11 bps. Surprisingly, swaps overall were largely unfazed by the US Govt shutdown. Overall, swaps widened for 15 out of 27 domestic financial institutions.

Tightened the most WoW: AXP, CB, MTG

Widened the most WoW: TRV, GS, LNC

Tightened the most WoW: AXP, ALL, COF

Widened the most MoM: MBI, AGO, RDN

MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 1

2. European Financial CDS - EU bank swaps tightened further on the week. Spanish, Italian and French banks all came in notably. On average, swaps tightened by 10 bps last week and are lower by 27 bps, on average, vs the prior month. One of the few EU Financials that posted deterioration was Sberbank of Russia, which saw swaps widen by 14 bps WoW.

MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 2

3. Asian Financial CDS - Asian Financials were largely uneventful last week. Chinese banks were nominally tighter, dropping an average 2 bps W/W. Japanese financials were mostly unchanged with the biggest movers at +5 bps (Mizuho) and -3 bps (Nomura). Indian banks were also mixed. Two out of three widened, but IDB Bank of India tightened 9 bps to 340 bps.

MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 17

4. Sovereign CDS – The real trade here remains shorting the US and being long the PIIGS. US Swaps widened 10 bps (+31%) again last week bringing the level to 41 bps. The M/M change has risen to +19 bps (+85%). For reference, US swaps peaked at 64 bps in late-July 2011, the last time the US Govt budget process was in total dysfunction. Meanwhile, Italian, Spanish, Portguese and Irish swaps were all notably tighter on the week.

MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 18

MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 3

MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 4

5. High Yield (YTM) Monitor – High Yield rates were almost unchanged, falling a modest 0.2 bps last week, ending the week at 6.29% versus 6.30% the prior week.

MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 5

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1.0 points last week, ending at 1807.

MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 6

7. TED Spread Monitor – The TED spread fell 1.3 basis points last week, ending the week at 22 bps this week versus last week’s print of 23.34 bps.

MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 7

8. CRB Commodity Price Index – The CRB index rose 0.2%, ending the week at 286 versus 286 the prior week. As compared with the prior month, commodity prices have decreased -1.5% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 8

9. Euribor-OIS Spread – The Euribor-OIS spread widened by 1 bp to 14 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. 

MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 9

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 2 basis points last week, ending the week at 3.13% versus last week’s print of 3.15%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 10

11. Markit MCDX Index Monitor – Last week spreads widened 3 bps ending the week at 89 bps versus 86 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.

MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 11

12. Chinese Steel – Steel prices in China fell 0.2% last week, or 6 yuan/ton, to 3488 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 12

13. 2-10 Spread – Last week the 2-10 spread widened to 232 bps, 2 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 13

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.6% upside to TRADE resistance and 1.0% downside to TREND support.

MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 14

Joshua Steiner, CFA

Jonathan Casteleyn, CFA, CMT