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Takeaway: The Washington-fueled global rally was as impressive as it was predictable. Now it's back to fundamentals over the short/intermediate term.

Risk Monitor / Key Takeaways:

The global rally fueled by the last-minute US debt ceiling increase was impressive. Anyone who still falls into the "de-coupling" camp would have a hard time arguing with the reality of last week's impressively high global/asset class correlation.

It's worth a quick mention that our proxy for risk throughout the dislocation was the interbank overnight markets, which showed consistent calm in the face of relentless media EOW coverage. The interbank measures, namely TED-Spread & Euribor-OIS, are building an increasingly reliable track record of throwing off correct signals without false errors. We profile them every week in our risk monitor.

Here are a few of the notable takeaways.

* Sovereign CDS – Sovereign swaps were tighter around the globe last week with the sole exception of the US, where swaps were flat at 34 bps. The real takeaway is the MoM change, particularly in Europe. Consistent with our 4Q13 macro theme of #EuroBulls, Portugal, Spain and Italy are tighter MoM by 136 bps, 35 bps and 33 bps, respectively. 

* European Financial CDS - Europe continues to dazzle. Only two EU financials widened last week, RBS (+1 bp) and Banco Popular (+19 bps). The rest of Europe was notably tighter. This continues a theme that's been in place for some time now. In fact, looking at the MoM trend, the mean/median change in EU financial CDS is tighter by 31/8 bps, respectively. 

  

* 2-10 Spread – Last week the 2-10 spread tightened to 227 bps, -7 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

* High Yield – High Yield rates fell 25.2 bps last week, ending the week at 5.99% versus 6.24% the prior week.

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 6 of 13 improved / 2 out of 13 worsened / 5 of 13 unchanged

 • Intermediate-term(WoW): Positive / 9 of 13 improved / 1 out of 13 worsened / 3 of 13 unchanged

 • Long-term(WoW): Negative / 2 of 13 improved / 2 out of 13 worsened / 9 of 13 unchanged

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1. U.S. Financial CDS -  It was a clean sweep for US Financials last week, with swaps tightening across the board as the government finally got its act together. The mean/median tightening across the sector was 20/13 bps, respectively. The most improved were MS, MBIA and MTG. 

Tightened the most WoW: MTG, MBI, MS

Widened the most/ tightened the least WoW: GNW, GNW, RDN

Tightened the most WoW: AXP, MS, ALL

Widened the most MoM: MBI, RDN, AGO

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2. European Financial CDS - Europe continues to dazzle. Only two EU financials widened last week, RBS (+1 bp) and Banco Popular (+19 bps). The rest of Europe was notably tighter. This continues a theme that's been in place for some time now. In fact, looking at the MoM trend, the mean/median change in EU financial CDS is tighter by 31/8 bps, respectively. 

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3. Asian Financial CDS - Tighter. Only Japan's Matsui was wider on the week (+3 bps). Chinese and Indian bank swaps were tighter across the boards, as were Japanese banks with the exception of Matsui.

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4. Sovereign CDS – Sovereign swaps were tighter around the globe last week with the sole exception of the US, where swaps were flat at 34 bps. The real takeaway is the MoM change, particularly in Europe. Consistent with our 4Q13 macro theme of #EuroBulls, Portugal, Spain and Italy are tighter MoM by 136 bps, 35 bps and 33 bps, respectively. 

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5. High Yield (YTM) Monitor – High Yield rates fell 25.2 bps last week, ending the week at 5.99% versus 6.24% the prior week.

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6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 3.0 points last week, ending at 1811.

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7. TED Spread Monitor – The TED spread rose 3.0 basis points last week, ending the week at 21.6 bps this week versus last week’s print of 18.56 bps.

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8. CRB Commodity Price Index – The CRB index rose 0.5%, ending the week at 287 versus 286 the prior week. As compared with the prior month, commodity prices have decreased -1.2% 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 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. 

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10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 6 basis points last week, ending the week at 3.04% versus last week’s print of 3.10%. 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 12 bps, ending the week at 89 bps versus 101 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 0.2% last week, or 7 yuan/ton, to 3499 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 227 bps, -7 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 2.8% downside to TRADE support.

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Joshua Steiner, CFA

Jonathan Casteleyn, CFA, CMT