MONDAY MORNING RISK MONITOR: THE SETUP REMAINS FAVORABLE

Takeaway: We continue to see few, if any, indications of trouble brewing on the risk front.

Risk Monitor / Key Takeaways:

Financials continue their winning ways, rising another 1.3% last week. Based on our interpretation of the risk monitor the setup remains very favorable from an intermediate term trend standpoint. The short-term trade setup is less favorable, though not negative. A few of the callouts include ongoing stability/further tightening in the TED Spread and Euribor-OIS, but further widening in the Shifon Index. Rising rates are also generally a tailwind with the month-over-month change in the 2-10 yield spread now at 14 bps. We provide a brief summary below of some of the notable callouts across the various risk measures we track.

 

* Sovereign CDS – Portuguese sovereign swaps widened 14 bps last week, but it was the exception. Elsewhere, swaps either tightened or went unchanged. The largest improvements came from the US and Japan, tightening 6 and 4 bps, respectively. 

 

* Asian Financial CDS - Indian banks widened significantly last week with ICICI wider by 40 bps and the other two major Indian banks wider by 24-25 bps. Chinese banks were mostly unchanged except for Bank of China, where swaps widened by 4 bps. Japan's banks were mixed last week with the largest move coming from Matsui, where swaps widened by 14 bps to 231 bps.

 

* U.S. Financial CDS -  Large cap US banks were tighter across the board last week with an average improvement of 5 bps. Insurers also posted strong improvement, tightening by an average 8 bps. Overall, swaps tightened for 20 out of 27 domestic financial institutions.

 

Financial Risk Monitor Summary

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

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

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

 

MONDAY MORNING RISK MONITOR: THE SETUP REMAINS FAVORABLE - 15

 

1. U.S. Financial CDS -  Large cap US banks were tighter across the board last week with an average improvement of 5 bps. Insurers also posted strong improvement, tightening by an average 8 bps. Overall, swaps tightened for 20 out of 27 domestic financial institutions.

 

Tightened the most WoW: MBI, AGO, CB

Widened the most WoW: RDN, MTG, XL

Tightened the most WoW: MBI, AGO, MS

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

 

MONDAY MORNING RISK MONITOR: THE SETUP REMAINS FAVORABLE - 1

 

2. European Financial CDS - European banks posted a rare week of widening, but only nominally so. The average change was +2 bps. Spanish and Italian banks showed the largest increases, though those increases were still relatively modest at 10-11 bps. Improvements came from Greek and Belgian banks, where swaps continued to tighten.

 

MONDAY MORNING RISK MONITOR: THE SETUP REMAINS FAVORABLE - 2

 

3. Asian Financial CDS - Indian banks widened significantly last week with ICICI wider by 40 bps and the other two major Indian banks wider by 24-25 bps. Chinese banks were mostly unchanged except for Bank of China, where swaps widened by 4 bps. Japan's banks were mixed last week with the largest move coming from Matsui, where swaps widened by 14 bps to 231 bps.

 

MONDAY MORNING RISK MONITOR: THE SETUP REMAINS FAVORABLE - 17

 

4. Sovereign CDS – Portuguese sovereign swaps widened 14 bps last week, but it was the exception. Elsewhere, swaps either tightened or went unchanged. The largest improvements came from the US and Japan, tightening 6 and 4 bps, respectively. 

 

MONDAY MORNING RISK MONITOR: THE SETUP REMAINS FAVORABLE - 18

 

MONDAY MORNING RISK MONITOR: THE SETUP REMAINS FAVORABLE - 3

 

MONDAY MORNING RISK MONITOR: THE SETUP REMAINS FAVORABLE - 4

 

5. High Yield (YTM) Monitor – High Yield rates rose 1.2 bps last week, ending the week at 6.05% versus 6.04% the prior week.

 

MONDAY MORNING RISK MONITOR: THE SETUP REMAINS FAVORABLE - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index was unchanged last week, ending at 1828.

 

MONDAY MORNING RISK MONITOR: THE SETUP REMAINS FAVORABLE - 6

 

7. TED Spread Monitor – The TED spread fell 1.9 basis points last week, ending the week at 16.7 bps this week versus last week’s print of 18.64 bps.

 

MONDAY MORNING RISK MONITOR: THE SETUP REMAINS FAVORABLE - 7

 

8. CRB Commodity Price Index – The CRB index rose 0.1%, ending the week at 274 versus 274 the prior week. As compared with the prior month, commodity prices have decreased -4.2% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: THE SETUP REMAINS FAVORABLE - 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: THE SETUP REMAINS FAVORABLE - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 43 basis points last week, ending the week at 4.19% versus last week’s print of 3.76%. 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: THE SETUP REMAINS FAVORABLE - 10

 

11. Markit MCDX Index Monitor – Last week spreads tightened -1 bps, ending the week at 85 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: THE SETUP REMAINS FAVORABLE - 11

 

12. Chinese Steel – Steel prices in China fell 0.4% last week, or 16 yuan/ton, to 3,543 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: THE SETUP REMAINS FAVORABLE - 12

 

13. 2-10 Spread – Last week the 2-10 spread widened to 242 bps, 13 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: THE SETUP REMAINS FAVORABLE - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.6% upside to TRADE resistance and 1.7% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: THE SETUP REMAINS FAVORABLE - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more

Got Process? Zero Hedge Sells Fear, Not Truth

Fear sells. Always has. Look no further than Zero Hedge.

read more

REPLAY: Review of $EXAS Earnings Call (A Hedgeye Best Idea Long)

Our Healthcare Team made a monster call to be long EXAS - hear their updated thoughts.

read more

Capital Brief: 5 Things to Watch Right Now In Washington

Here's a quick look at some key issues investors should keep an eye on from Hedgeye's JT Taylor and our team of Washington Policy analysts in D.C.

read more

Premium insight

[UNLOCKED] Today's Daily Trading Ranges

“If I could only have one thing of the many things we have it would be my daily ranges." Hedgeye CEO Keith McCullough said recently.

read more

We'll Say It Again: Leave Your Politics Out of Your Portfolio

If your politics dictates your portfolio positioning, the Democrats and #NeverTrump crowd out there have had a hell of a week.

read more

Cartoon of the Day: 'Biggest Tax Cut Ever'

President Donald Trump's economic team unveiled what he called last week, "the biggest tax cut we’ve ever had.” Before you get too excited about that hang on a sec. "Trump Tax Reform ain’t gettin’ done anytime soon," Hedgeye CEO Keith McCullough wrote in today's Early Look.

read more

Neurofinance: The Psychology Behind When To Sell A Bull Market

"Most momentum investors stay invested too long, under-reacting and holding tight after truly bad news finally arrives to break the trend," writes MarketPsych's Richard Peterson.

read more