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    MARKET EDGES

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Takeaway: The positive momentum of the risk monitor data we track cooled a bit in the most recent week but remains on the right track.

Risk Monitor / Key Takeaways:

* 2-10 Spread – Last week the 2-10 spread reached its widest level since the summer of 2011 at 255 bps, 9 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

* European Financial CDS - Swaps were wider across the board in European banks with the exception of Greece, where swaps tightened for all three banks we track. The median increase was +14 bps with the largest relative widening occurring in France and Austria.

* CRB Commodity Price Index – The CRB index rose 1.9%, ending the week at 279 versus 274 the prior week. As compared with the prior month, commodity prices have increased 2.0% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 2 of 13 improved / 5 out of 13 worsened / 6 of 13 unchanged

 • Intermediate-term(WoW): Positive / 6 of 13 improved / 2 out of 13 worsened / 5 of 13 unchanged

 • Long-term(WoW): Positive / 4 of 13 improved / 3 out of 13 worsened / 6 of 13 unchanged

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1. U.S. Financial CDS -  Swaps across US Financials were relatively unchanged last week, though the mortgage insurers saw sharp improvements, with MTG and RDN swaps dropping 35 and 46 bps, respectively. 

Tightened the most WoW: TRV, RDN, MTG

Widened the most WoW: JPM, AXP, COF

Tightened the most WoW: MBI, C, WFC

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

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2. European Financial CDS - Swaps were wider across the board in European banks with the exception of Greece, where swaps tightened for all three banks we track. The median increase was +14 bps with the largest relative widening occurring in France and Austria.  

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3. Asian Financial CDS - Asia was mixed last week, with Chinese swaps wider by an average of 4 bps while India's banks widened by 2 bps, on average. Japanese Financials were mixed, but generally modestly lower. The main trend in Asia worth keeping an eye on is Indian bank swaps, which remain sharply higher on a month-over-month basis.

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4. Sovereign CDS – Sovereign swaps were wider around the globe last week with the sole exception of Japan (-1 bp). Portugal and Spain led the charge higher, rising 19 and 13 bps, respectively. The US, Germany and France were little changed. 

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5. High Yield (YTM) Monitor – High Yield rates rose 8.8 bps last week, ending the week at 6.02% versus 5.93% the prior week.

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6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1 point last week, ending at 1830.

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7. TED Spread Monitor – The TED spread rose 0.2 basis points last week, ending the week at 18.3 bps this week versus last week’s print of 18.11 bps.

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8. CRB Commodity Price Index – The CRB index rose 1.9%, ending the week at 279 versus 274 the prior week. As compared with the prior month, commodity prices have increased 2.0% 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 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. 

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10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 2 basis points last week, ending the week at 3.70% versus last week’s print of 3.72%. 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 widened 2 bps, ending the week at 83 bps versus 81 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 0.4% last week, or 15 yuan/ton, to 3552 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 255 bps, 9 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 1.4% upside to TRADE resistance and 1.3% downside to TRADE support.

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Joshua Steiner, CFA

Jonathan Casteleyn, CFA, CMT