Risk measures remain benign overall, hence the title of this week's note. Rising commodity prices are one of the few negative developments. In the last month commodity prices have risen 2.1% with oil now playing a more notable role in that increase. That being said, we continue to see few red flags across the risk landscape.
Financial Risk Monitor Summary
• Short-term(WoW): Positive / 4 of 13 improved / 1 out of 13 worsened / 8 of 13 unchanged
• Intermediate-term(WoW): Positive / 6 of 13 improved / 3 out of 13 worsened / 4 of 13 unchanged
• Long-term(WoW): Positive / 4 of 13 improved / 2 out of 13 worsened / 7 of 13 unchanged
1. U.S. Financial CDS - Swaps were generally tighter for US Financials last week, but widened significantly at bond insurers MBIA and Assured Guaranty. Mortgage Insurers MTG & RDN were tighter on the week with Radian posting the largest one week improvement at -19 bps.
Tightened the most WoW: RDN, COF, PRU
Widened the most WoW: MBI, AGO, CB
Tightened the most WoW: RDN, WFC, TRV
Widened the most MoM: AGO, MBI, XL
2. European Financial CDS - European banks resumed their winning ways last week, posting another sharp improvement. Spanish and Italian bank swaps led the charge lower. On a month-over-month basis, the average EU bank is trading 17 bps tighter (9%) tighter.
3. Asian Financial CDS - Indian banks remain the yo-yo of international banking systems. This week swaps were down sharply across the Indian banking complex. Chinese bank swaps have been trending slowly tighter. Japanese bank swaps were notably tighter on the week.
4. Sovereign CDS – Sovereign swaps were tighter throughout much of Europe last week. Italy and Spain saw sovereign swaps tighten 17 and 15 bps, respectively. Elsewhere in the world, swaps were little changed.
5. High Yield (YTM) Monitor – High Yield rates rose 1.4 bps last week, ending the week at 6.03% versus 6.02% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 2.0 points last week, ending at 1832.
7. TED Spread Monitor – The TED spread fell 0.2 basis points last week, ending the week at 18.1 bps this week versus last week’s print of 18.3 bps.
8. CRB Commodity Price Index – The CRB index rose 0.6%, ending the week at 280 versus 278 the prior week. As compared with the prior month, commodity prices have increased 2.1% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.
9. Euribor-OIS Spread – The Euribor-OIS spread widened by 1 basis point to 10 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 24 basis points last week, ending the week at 3.46% versus last week’s print of 3.7%. 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 widened 7 bps, ending the week at 90 bps versus 83 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 rose 0.5% last week, or 16 yuan/ton, to 3,568 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 tightened 1 basis point to 254 bps. 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 1.2% downside to TRADE support.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT