Summary: US risk measures continue to wane with the exception of ongoing increases in commodity prices. The steepening yield curve is an ongoing tailwind for banks and bank stocks. In Europe, while the banks look good, we're keeping one eye on the Euribor-OIS spread as it's been widening for the last few weeks, albeit to still nominal levels of ~14 bps.
* 2-10 Spread – Last week the 2-10 spread widened to 261 bps, 10 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.
* Euribor-OIS Spread – The Euribor-OIS spread widened by 2 bps to 14 bps.
* CRB Commodity Price Index – The CRB index rose 1.4%, ending the week at 284 versus 280 the prior week. As compared with the prior month, commodity prices have increased 3.9% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.
Financial Risk Monitor Summary
• Short-term(WoW): Positive / 4 of 13 improved / 3 out of 13 worsened / 6 of 13 unchanged
• Intermediate-term(WoW): Negative / 2 of 13 improved / 6 out of 13 worsened / 5 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 - The insurance complex was notably tigher last week while the large cap banks and specialty finance names were mixed. Overall, swaps tightened for 21 out of 27 domestic financial institutions.
Tightened the most WoW: TRV, LNC, HIG
Widened the most WoW: AXP, WFC, AGO
Tightened the most WoW: TRV, PRU, LNC
Widened the most/ tightened the least MoM: AGO, MBI, XL
2. European Financial CDS - Swaps mostly tightened in Europe's banking system last week with the average change -1 bp and the median -2 bps.
3. Asian Financial CDS - Indian banks were again tighter this week, though narrowly so. The performance across Japanese financials was similar.
4. Sovereign CDS – Sovereign swaps mostly tightened over last week. French sovereign swaps tightened by -1.0% (-1 bps to 54 ) and Spanish sovereign swaps widened by 1.7% (3 bps to 157).
5. High Yield (YTM) Monitor – High Yield rates fell 3.9 bps last week, ending the week at 5.98% versus 6.02% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 2.0 points last week, ending at 1836.
7. TED Spread Monitor – The TED spread fell 0.6 basis points last week, ending the week at 18.4 bps this week versus last week’s print of 19.04 bps.
8. CRB Commodity Price Index – The CRB index rose 1.4%, ending the week at 284 versus 280 the prior week. As compared with the prior month, commodity prices have increased 3.9% 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 2 bps to 14 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 rose 7 basis points last week, ending the week at 4.00% versus last week’s print of 3.927%. 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 -2 bps, ending the week at 89 bps versus 91 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 1.0% last week, or 37 yuan/ton, to 3507 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 261 bps, 10 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 1.4% upside to TRADE resistance and 2.4% downside to TRADE support.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT