Risk Monitor / Key Takeaways:
For a while now we've been flagging the particularly conducive environment for Financials on both the risk and fundamental fronts. This week remains the same. The setup remains favorable from both a short and intermediate term trend standpoint. A few of the callouts include ongoing stability/further increases in the 2-10 spread, ongoing stability and even marginal tightening in Euribor-OIS and even in the Shifon Index. Rising rates are also again becoming a general tailwind. We provide a brief summary below of some of the notable callouts across the various risk measures we track.
* U.S. Financial CDS - Another good week for the US Financials with swaps tightening 4 bps, on average. Large caps were leaders, tightening by 4-8 bps across the board.
* European Financial CDS - Europe's banks resume their winning ways, dropping an average of 8 bps W/W. Italian, Spanish and UK banks led the charge lower.
* 2-10 Spread – Last week the 2-10 spread widened to 246 bps, 5 bps wider than a week ago.
Financial Risk Monitor Summary
• Short-term(WoW): Positive / 6 of 13 improved / 0 out of 13 worsened / 7 of 13 unchanged
• Intermediate-term(WoW): Positive / 9 of 13 improved / 1 out of 13 worsened / 3 of 13 unchanged
• Long-term(WoW): Positive / 4 of 13 improved / 1 out of 13 worsened / 8 of 13 unchanged
1. U.S. Financial CDS - Another good week for the US Financials with swaps tightening 4 bps, on average. Large caps were leaders, tightening by 4-8 bps across the board.
Tightened the most WoW: JPM, BAC, GS
Widened the most WoW: MMC, TRV, CB
Tightened the most WoW: MBI, AGO, WFC
Widened the most/ tightened the least MoM: SLM, XL, XL
2. European Financial CDS - Europe's banks resume their winning ways, dropping an average of 8 bps W/W. Italian, Spanish and UK banks led the charge lower.
3. Asian Financial CDS - Asia was tighter almost across the board, save for one Indian bank (+2 bps).
4. Sovereign CDS – Sovereign swaps were mixed last week with the biggest up moves in the US (+5 bps) and Ireland (+4 bps) and the biggest down moves in Spain (-9 bps) and Portugal (-7 bps).
5. High Yield (YTM) Monitor – High Yield rates fell 4.6 bps last week, ending the week at 6.00% versus 6.05% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1.0 point last week ending at 1829.
7. TED Spread Monitor – The TED spread fell 0.4 basis points last week, ending the week at 16.3 bps this week versus last week’s print of 16.71 bps.
8. CRB Commodity Price Index – The CRB index rose 0.6%, ending the week at 275 versus 273 the prior week. As compared with the prior month, commodity prices have decreased -2.3% 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 2 bps to 9 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 fell 57 basis points last week, ending the week at 3.89% versus last week’s print of 4.45%. 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 -1 bps, 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.
12. Chinese Steel – Steel prices in China fell 0.3% last week, or 11 yuan/ton, to 3532 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 widened to 246 bps, 5 bps wider 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 0.8% upside to TRADE resistance and 1.9% downside to TRADE support.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT