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European Banking Monitor: Shrinking Risk

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

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European Financial CDS - Swaps tightened broadly across European Financials last week. #EuroBulls remains alive and well in the banking sector as the EU Financials posted a mean and median tightening of 5 and 14 bps, respectively. The biggest improvements came from Greece, Spain, Italy and Portugal. The only negative divergence was again Sberbank of Russia, where swaps widened 7 bps to 219 bps on further commodity deflation.

 

European Banking Monitor: Shrinking Risk - yy.banks

 

Sovereign CDS – Sovereign swaps were tighter across the board except in the US, where swaps widened a modest 1 bp to 31 bps. The biggest improvements came from Portugal (-31 bps) and Spain (-13 bps). 

 

European Banking Monitor: Shrinking Risk - yy. cds1

 

European Banking Monitor: Shrinking Risk - yy.cds2

 

European Banking Monitor: Shrinking Risk - yy.cds3

 

Euribor-OIS Spread – The Euribor-OIS spread was unchanged 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. 

 

European Banking Monitor: Shrinking Risk - yy.euribor

 



$AMZN + USPS = Win, Win, Win

Takeaway: This news announcement is a win-win-win all around.

Editor's note: Hedgeye Retail Sector Head Brian McGough sees good news all around on news that the US Postal Service has entered a partnership with online retail giant Amazon to deliver its packages on Sundays for the first time.

 

$AMZN + USPS = Win, Win, Win - amabez

 

From the Wall Street Journal:

  • "Amazon.com Inc. will begin delivering packages on Sundays in the nation's two largest cities later this month with...the United States Postal Service."
  • "Amazon said Sunday delivery will begin on Nov. 17 in Los Angeles and New York and expand next year to Dallas, New Orleans, Houston and Phoenix, among others. Amazon will bring packages from its warehouses to Postal Service locations on Saturday evening or Sunday morning. The agency will then deliver them to doorsteps."
  • "Sunday delivery will be available for all Amazon customers in markets where the program is available at no additional cost. Customers won't specify Sunday delivery; eligible items will show up on Sunday if that is when they are ready."

Takeaway: This is a win, win, win. Consumers win, for obvious reasons. Amazon wins, as it can advertise Sunday delivery for the first time ever (and does so on the cheap by taking advantage of the USPS when it's on the ropes). Finally, the beleaguered Post Office wins. This partnership with Amazon is a cash flow stream -- albeit a minor one -- that helps prolong its inevitable demise.  

 


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MONDAY MORNING RISK MONITOR: RISING RATES AND SHRINKING RISK

Takeaway: Both the US & EU banking systems are leading the charge higher as systemic risk measures remain in check, rates rise and the CRB falls.

Risk Monitor / Key Takeaways:

Friday was a watershed day as rates rose and Financials rallied aggressively, the best performing sector in the market. Not surprisingly, we saw a close resemblance between Friday's performance and the broader performance from early May to early September, i.e. the positively correlated, rate-sensitive Financials that led the charge from May to Sep were back in force on Friday. The Financials are now again bullish across all 3 durations in our quantitative model. We provide a brief summary below of some of the notable callouts across the various risk measures we track.

 

* 2-10 Spread – Last week the 2-10 spread widened to 230 bps, 6 bps wider than a week ago. 

 

* Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 56 basis points last week, ending the week at 3.73% versus last week’s print of 4.289%.

 

* CRB Commodity Price Index – The CRB index fell -2.0%, ending the week at 274 versus 280 the prior week. As compared with the prior month, commodity prices have decreased -4.5% 

 

* High Yield (YTM) Monitor – High Yield rates rose 8.2 bps last week, ending the week at 6.03% versus 5.95% the prior week.

 

* European Financial CDS - Swaps tightened broadly across European Financials last week. #EuroBulls remains alive and well in the banking sector..

 

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 / 8 of 13 improved / 1 out of 13 worsened / 4 of 13 unchanged

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

 

MONDAY MORNING RISK MONITOR: RISING RATES AND SHRINKING RISK - 15

 

1. U.S. Financial CDS -  Last week was largely uneventful for US banks and insurers as swaps were decidely mixed and little changed. Overall, swaps widened for 15 out of 27 domestic financial institutions, rising by a median 2 bps (though unch'd on an average basis). 

 

Tightened the most WoW: WFC, HIG, MBI

Widened the most WoW: CB, ALL, AXP

Tightened the most WoW: MTG, MS, AGO

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

 

MONDAY MORNING RISK MONITOR: RISING RATES AND SHRINKING RISK - 1

 

2. European Financial CDS - Swaps tightened broadly across European Financials last week. #EuroBulls remains alive and well in the banking sector as the EU Financials posted a mean and median tightening of 5 and 14 bps, respectively. The biggest improvements came from Greece, Spain, Italy and Portugal. The only negative divergence was again Sberbank of Russia, where swaps widened 7 bps to 219 bps on further commodity deflation.

 

MONDAY MORNING RISK MONITOR: RISING RATES AND SHRINKING RISK - 2

 

3. Asian Financial CDS - Asia was again mixed last week, but generally worse. Indian banks saw swaps at 2 out of 3 rise materially. Japanese banks were generally higher with the exception of Daiwa where swaps tightened 3 bps. Chinese banks were also mixed with two tightening 5 bps and one widening 4 bps.

 

MONDAY MORNING RISK MONITOR: RISING RATES AND SHRINKING RISK - 17

 

4. Sovereign CDS – Sovereign swaps were tighter across the board except in the US, where swaps widened a modestt 1 bp to 31 bps. The biggest improvements came from Portgual (-31 bps) and Spain (-13 bps). 

 

MONDAY MORNING RISK MONITOR: RISING RATES AND SHRINKING RISK - 18

 

MONDAY MORNING RISK MONITOR: RISING RATES AND SHRINKING RISK - 3

 

MONDAY MORNING RISK MONITOR: RISING RATES AND SHRINKING RISK - 4

 

5. High Yield (YTM) Monitor – High Yield rates rose 8.2 bps last week, ending the week at 6.03% versus 5.95% the prior week.

 

MONDAY MORNING RISK MONITOR: RISING RATES AND SHRINKING RISK - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 7.0 points last week, ending at 1828.

 

MONDAY MORNING RISK MONITOR: RISING RATES AND SHRINKING RISK - 6

 

7. TED Spread Monitor – The TED spread fell 1.4 basis points last week, ending the week at 18.6 bps this week versus last week’s print of 19.98 bps.

 

MONDAY MORNING RISK MONITOR: RISING RATES AND SHRINKING RISK - 7

 

8. CRB Commodity Price Index – The CRB index fell -2.0%, ending the week at 274 versus 280 the prior week. As compared with the prior month, commodity prices have decreased -4.5% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: RISING RATES AND SHRINKING RISK - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread was unchanged 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. 

 

MONDAY MORNING RISK MONITOR: RISING RATES AND SHRINKING RISK - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 56 basis points last week, ending the week at 3.73% versus last week’s print of 4.289%. 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: RISING RATES AND SHRINKING RISK - 10

 

11. Markit MCDX Index Monitor – Last week spreads widened 2 bps, ending the week at 86 bps versus 84 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: RISING RATES AND SHRINKING RISK - 11

 

12. Chinese Steel – Steel prices in China rose 1.4% last week, or 49 yuan/ton, to 3559 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: RISING RATES AND SHRINKING RISK - 12

 

13. 2-10 Spread – Last week the 2-10 spread widened to 230 bps, 6 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: RISING RATES AND SHRINKING RISK - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.6% upside to TRADE resistance and 1.5% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: RISING RATES AND SHRINKING RISK - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


MACAU TRACKING TOWARD 20% +

Table revenues for the first 10 days of November were solid with average daily up 20%+ over the comparable period of last year.  We won’t put too much emphasis on 10 days of data other than to say that we feel comfortable with our full month GGR projection of 17-22% YoY growth.  November should mark a slowdown from the blockbuster October growth of 32% but we believe that is well-known.  Maybe less known is the tough December comparison, which could drive December growth down to the low to mid-teens.

 

Market shares mean little at this stage of the month but for what it’s worth MGM and MPEL are off to a good start while LVS, Galaxy, and SJM shares are all below recent trend.

 

MACAU TRACKING TOWARD 20% + - m2

 

MACAU TRACKING TOWARD 20% + - m3


G-N-A-R-L-Y

Client Talking Points

US DOLLAR

The new public enemy #1 to the purchasing power of Americans (Janet Yellen) will be front and center in Washington this Thursday. Will she eliminate economic gravity expectations for the U.S. to ever taper? Ever? Will the foreign exchange market reverse all of last week’s US Dollar's gains? @Hedgeye TREND resistance for US Dollar Index is $81.29

EMERGING MARKETS

We brought back the pre-no-taper-decision band last week (Up Dollar + #RatesRising). Emerging Markets didn’t like that anymore than Gold did. The MSCI Emerging Markets down -1.7% and MSCI Latin America down -2.8% on the week with the Dow hitting another all-time high. This is getting gnarly again. Incidentally, the SPX risk range is 1748-1778 now.

GOLD

Gold was down -1.9% last week and down another -0.5% this morning. For almost a year now, my mean reversion target level for Gold has been $1271. So, I’m interested in buying back closer to that price with Janet Yellen being my catalyst on Thursday. The net long position (futures/options) in Gold dropped -13% last week. More to be revealed here.

Asset Allocation

CASH 62% US EQUITIES 6%
INTL EQUITIES 6% COMMODITIES 0%
FIXED INCOME 6% INTL CURRENCIES 20%

Top Long Ideas

Company Ticker Sector Duration
DAX

In line with our #EuroBulls Q4 theme, we’re long the German DAX via the etf EWG. With European fundamentals showing improvement off low levels, we expect outperformance from Germany, and in turn for the region’s largest economy to pull the rest of the region higher. ECB policy remains highly accommodative and prepared to aid any of its sovereign members to preserve the Union. Inflation remains moderate and fundamentals are positive: confidence readings and PMIs are up since June, with factory orders trending higher and retail sales inflecting to push the trade balance higher. Finally, the unemployment rate has held steady at the low level of 6.9%, all of which signals to us that Germany’s economic climate is ramping up.

WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

TROW

Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road

TWEET OF THE DAY

What is the enemy of Gold? #StrongDollar + #RatesRising @KeithMcCullough

QUOTE OF THE DAY

The greatness of America lies not in being more enlightened than any other nation, but rather in her ability to repair her faults. -Alexis de Tocqueville 

STAT OF THE DAY

In the year 2000, there were only 17 million Americans on food stamps.  Today, there are more than 47 million Americans on food stamps.


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