MONDAY MORNING RISK MONITOR: MORE GOOD NEWS THAN BAD

Takeaway: Europe and its banks improved again (even in Greece). Spreads widened modestly and commodity prices fell further.

Risk Monitor / Key Takeaways:

Things appear to be going the right way again, on the margin. Yield spreads widened modestly for the first time in some time (+3 bps W/W). Commodity prices continued to fall, dropping another 2.4% last week. Sovereign credit default swaps dropped notably with the US leading the charge and Europe close behind. Europe's banks also looked quite good, again. The only notable area to watch remains the Chinese interbank rate which climbed again last week, tacking on another 22 bps. 

 

* 2-10 Spread – Last week the 2-10 spread widened 3 bps to 224 bps.

 

* CRB Commodity Price Index – The CRB index fell -2.4%, ending the week at 275 versus 282 the prior week. As compared with the prior month, commodity prices are down -3.7% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

* Sovereign CDS – Sovereign swaps had a good week last week. The US posted a sharp improvement of 7 bps, falling to 30 bps. France and most of the rest of the Europe also moved lower. The only negative movers were Japan (+2 bps) and Germany (+1 bp). 

 

* European Financial CDS - Europe resumes its winning ways. We are seeing broad-based improvement across Spanish, Italian, French and even Greek banks. The only notable widening came from Sberbank of Russia, where swaps widened by 19 bps to 212 bps.

 

* Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 22 basis points last week, ending the week at 4.59% versus last week’s print of 4.37%. 

 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 5 of 13 improved / 1 out of 13 worsened / 7 of 13 unchanged

 • Intermediate-term(WoW): Positive / 10 of 13 improved / 1 out of 13 worsened / 2 of 13 unchanged

 • Long-term(WoW): Positive / 2 of 13 improved / 1 out of 13 worsened / 10 of 13 unchanged

 

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1. U.S. Financial CDS - US Financials were mixed with large cap banks predominantly wider, though only by 1-2 bps, on average. US mortgage insurers, MTG & RDN were tighter, improving by 20 and 15 bps, respectively. US Insurers were broadly tighter last week.

 

Tightened the most WoW: ALL, MBI, AGO

Widened the most WoW: COF, AXP, C

Tightened the most WoW: MS, CB, AIG

Widened the most/ tightened the least MoM: TRV, GNW, GNW

 

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2. European Financial CDS - Europe resumes its winning ways. We are seeing broad-based improvement across Spanish, Italian, French and even Greek banks. The only notable widening came from Sberbank of Russia, where swaps widened by 19 bps to 212 bps.

 

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3. Asian Financial CDS - Asia was mixed last week, but on balance tighter. The largest movers were Japan's Nomura and Matsui Securities, tightening by 11 and 14 bps, respectively. On the month, the largest movers remain India's banks, tighter by an average 32 bps.

 

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4. Sovereign CDS – Sovereign swaps had a good week last week. The US posted a sharp improvement of 7 bps, falling to 30 bps. France and most of the rest of the Europe also moved lower. The only negative movers were Japan (+2 bps) and Germany (+1 bp). 

 

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5. High Yield (YTM) Monitor – High Yield rates rose 3.3 bps last week, ending the week at 5.95% versus 5.92% the prior week.

 

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6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 3.0 points last week, ending at 1821.

 

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7. TED Spread Monitor – The TED spread fell 0.4 basis points last week, ending the week at 20 bps this week versus last week’s print of 20.4 bps.

 

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8. CRB Commodity Price Index – The CRB index fell -2.4%, ending the week at 275 versus 282 the prior week. As compared with the prior month, commodity prices have decreased -3.7% 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 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. 

 

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10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 22 basis points last week, ending the week at 4.59% versus last week’s print of 4.367%. 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 tightened by 1 bp, ending the week at 84 bps versus 85 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 rose 0.9% last week, or 30 yuan/ton, to 3510 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 widened to 224 bps, 3 bps wider 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 0.7% upside to TRADE resistance and 0.6% downside to TRADE support.

 

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Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT


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