Risk Monitor / Key Takeaways:
A few of the notable callouts on the risk front this morning include China's interbank lending rate, Shifon, rising 109 bps W/W to 409 bps and a broad-based reversal in CDS at both the institutional and sovereign level.
* Chinese interbank rates rose 109 basis points last week, ending the week at 4.09% versus last week’s print of 3.00%.
* Sovereign swaps showed further improvement across Europe with the exception of Germany, which widened by 3 bps, though still trades well inside of the US. Interestingly, the US widened again last week, adding 3 bps and rising to 37 bps.
* High Yield rates fell 7.4 bps last week, ending the week at 5.92% versus 5.99% the prior week.
Financial Risk Monitor Summary
• Short-term(WoW): Negative / 4 of 13 improved / 4 out of 13 worsened / 5 of 13 unchanged
• Intermediate-term(WoW): Positive / 8 of 13 improved / 2 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
1. U.S. Financial CDS - In the US, swaps widened for 16 out of 27 financial institutions. The average and median increase were both 3 bps. On a M/M basis, however, swaps remain tighter by 7-8 bps. The large cap banks all worsened on the week with JPM, BAC and C all widening by 6 bps. WFC, GS and MS, however, all tightened by 1 bp.
Tightened the most WoW: AXP, COF, PRU
Widened the most WoW: C, UNM, ALL
Tightened the most WoW: AXP, COF, CB
Widened the most/ tightened the least MoM: MBI, GNW, GNW
2. European Financial CDS - Swaps widened modestly in Europe last week, rising by an average 4 bps (median: +2 bps).
3. Asian Financial CDS - Chinese banks widened last week following the blow-out in the interbank lending rate. Indian banks, meanwhile, went the other way, tightening by 13-22 bps. Japanese Financials were largely unchanged on the week.
4. Sovereign CDS – Sovereign swaps showed further improvement across Europe with the exception of Germany, which widened by 3 bps, though still trades well inside of the US. Interestingly, the US widened again last week, adding 3 bps and rising to 37 bps.
5. High Yield (YTM) Monitor – High Yield rates fell 7.4 bps last week, ending the week at 5.92% versus 5.99% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 7.0 points last week, ending at 1818.
7. TED Spread Monitor – The TED spread fell 1.2 basis points last week, ending the week at 20.4 bps this week versus last week’s print of 21.56 bps.
8. CRB Commodity Price Index – The CRB index fell -1.8%, ending the week at 283 versus 288 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.
9. Euribor-OIS Spread – The Euribor-OIS spread tightened by 1 bps to 11 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 rose 109 basis points last week, ending the week at 4.09% versus last week’s print of 3.00%. 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 tightened 4 bps, ending the week at 85 bps versus 89 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 0.5% last week, or 19 yuan/ton, to 3480 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 tightened to 221 bps, -6 bps tighter 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 1.4% upside to TRADE resistance and 2.3% downside to TRADE support.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
