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European Banking Monitor: Improvement Continues Into Year-End

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

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European Financial CDS - Swaps mostly tightened in Europe's banking system last week with the average change -1 bp and the median -2 bps.

 

European Banking Monitor: Improvement Continues Into Year-End - z banks

 

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).

 

European Banking Monitor: Improvement Continues Into Year-End - z sov1

 

European Banking Monitor: Improvement Continues Into Year-End - z sov2

 

European Banking Monitor: Improvement Continues Into Year-End - z sov3

 

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. 

 

European Banking Monitor: Improvement Continues Into Year-End - z. euribor

 

Matthew Hedrick

Associate

 

 

 

 


[PODCAST]: Q&A WITH KEITH

Hedgeye CEO Keith McCullough answers top questions on this morning's macro call including where the S&P 500 is headed in 2014, whether he'd be buying Euros here and where Gold becomes an attractive short.

 


What a Year

Client Talking Points

JAPAN

The Nikkei closes its year up +0.7% at the year-to-date high of 16,291 up +59.3% as the Yen goes out on its year-to-date lows south of $105 (down -18% vs US Dollar). Bottom line: Get the Yen right, you’re still getting Japanese stocks right.

10YR UST

The 10-year Treasury is stiff-arming the US growth bears with a 3% handle again this morning. Putting that into its proper context (it's either +26 basis points month-over-month or +130 basis points year-over-year) this was a big move. The question now becomes do we breakout above this 3% level that the bond bull lobby hasn’t sanctioned? More to be revealed.

METALS

Nope. Precious metals do not like #RatesRising. Silver is down -1.8% this morning and Platinum (we shorted it in Real-Time Alerts on Friday) and Gold are down -0.9% and -0.7%, respectively. My immediate-term risk range says 10-year yield 3.05% and Gold $1179. Incidentally, the SPX risk range is 1817-1859. Higher-lows and higher-highs remain bullish until they aren’t.

Asset Allocation

CASH 40% US EQUITIES 15%
INTL EQUITIES 15% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 30%

Top Long Ideas

Company Ticker Sector Duration
FXB

Our bullish call on the British Pound was borne out of our Q4 Macro themes call. We believe the health of a nation’s economy is reflected in its currency. We remain bullish on the regime change at the BOE, replacing Governor Mervyn King with Mark Carney. In its October meeting, the Bank of England voted unanimously (9-0) to keep rates on hold and the asset purchase program unchanged.  If we look at the GBP/USD cross, we believe the UK’s hawkish monetary and fiscal policy should appreciate the GBP, as Bernanke/Yellen continue to burn the USD via delaying the call to taper.

WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

TROW

Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road

TWEET OF THE DAY

US Stocks last wk: SP500 and Russell2000 +1.3% each to +29.1% and +36.7% YTD respectively @KeithMcCullough

QUOTE OF THE DAY

"If you have zest and enthusiasm you attract zest and enthusiasm. Life does give back in kind." - Norman Vincent Peale

STAT OF THE DAY

Got Fear? The VIX continued its 2013 crash last week. It was down -9.6% week-over-week and down over -30% year-to-date.


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MONDAY MORNING RISK MONITOR: DOMESTIC MOMENTUM CONTINUES

Takeaway: The US continues to look quite good from a risk standpoint while Europe is showing at least one interesting negative development.

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

 

MONDAY MORNING RISK MONITOR: DOMESTIC MOMENTUM CONTINUES - 15

 

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

 

MONDAY MORNING RISK MONITOR: DOMESTIC MOMENTUM CONTINUES - 1

 

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.

 

MONDAY MORNING RISK MONITOR: DOMESTIC MOMENTUM CONTINUES - 2

 

3. Asian Financial CDS - Indian banks were again tighter this week, though narrowly so. The performance across Japanese financials was similar. 

 

MONDAY MORNING RISK MONITOR: DOMESTIC MOMENTUM CONTINUES - 17

 

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).

 

MONDAY MORNING RISK MONITOR: DOMESTIC MOMENTUM CONTINUES - 18

 

MONDAY MORNING RISK MONITOR: DOMESTIC MOMENTUM CONTINUES - 3

 

MONDAY MORNING RISK MONITOR: DOMESTIC MOMENTUM CONTINUES - 4

 

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.

 

MONDAY MORNING RISK MONITOR: DOMESTIC MOMENTUM CONTINUES - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 2.0 points last week, ending at 1836.

 

MONDAY MORNING RISK MONITOR: DOMESTIC MOMENTUM CONTINUES - 6

 

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.

 

MONDAY MORNING RISK MONITOR: DOMESTIC MOMENTUM CONTINUES - 7

 

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.

 

MONDAY MORNING RISK MONITOR: DOMESTIC MOMENTUM CONTINUES - 8

 

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. 

 

MONDAY MORNING RISK MONITOR: DOMESTIC MOMENTUM CONTINUES - 9

 

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.

 

MONDAY MORNING RISK MONITOR: DOMESTIC MOMENTUM CONTINUES - 10

 

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.

 

MONDAY MORNING RISK MONITOR: DOMESTIC MOMENTUM CONTINUES - 11


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.

 

MONDAY MORNING RISK MONITOR: DOMESTIC MOMENTUM CONTINUES - 12

 

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.

 

MONDAY MORNING RISK MONITOR: DOMESTIC MOMENTUM CONTINUES - 13

 

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.

 

MONDAY MORNING RISK MONITOR: DOMESTIC MOMENTUM CONTINUES - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 

 

 



Trust Your Process

“Self trust is the first secret of success.”

-Ralph Waldo Emerson

 

With a little more downtime than usual this past week I had the opportunity to crack open a few new books. One of them is a leadership book that’s been in my pile for almost a year now titled Unusually Excellent, by golf pro John Hamm.

 

The aforementioned quote is the opening line from Chapter One – Being Authentic, The Courage to Be Yourself. And it’s followed up by another insightful thought by Lao Tzu: “He who knows others is wise. He who knows himself is enlightened.”

 

Hamm’s core leadership framework has three parts: Credibility, Competence, and Consequence. In other words, be who you are, do what you do, and be accountable for the decisions you make. Trust your process in 2014 and people will probably trust you.

 

Back to the Global Macro Grind

 

When people ask me why I seem so confident in my process, it’s relatively easy to explain. My process embraces change and uncertainty. One of the simplest truths that I trust about this game is that my process will change as my business, markets, and economies do. It’s a lot easier being confident in that than a predetermined dogma, conclusion, or ideology.

 

Lots of people in the media have asked me what my “highest conviction calls are for 2014?” Instead of being put in a box, I just say that I’m very confident that I have no idea what will happen across a trivial twelve month period. Then the other side of the conversation gets quiet. And I assure them that its really ok. “I don’t know” is often the answer.

 

What I do know is that I’ll be up and at it, grinding away alongside my teammates, at the top of every risk management morning in 2014. Every day starts with information surprise – new economic data, market risks, price moves, etc. – it’s kind of like Christmas, but every morning, for Canadian-American macro market geeks.

 

On that score, last week was as interesting as any other week in 2013:

  1. US interest rates ripped back up to their YTD highs
  2. US stocks ripped back to their all-time highs

Even though this wasn’t the way consensus expectations drew it up with its “2013 predictions” at this time last year, all-time, as we like to say here @Hedgeye, is a long time.

 

With the Fed reacting (on a 3-month lag) to what markets have been pricing in all year (US GDP #GrowthAccelerating from 0.14% Q412 to 4.12% Q313), all we have witnessed here is a run-of-the-mill rotation out of fear (slow-growth yield chasing) and into growth itself:

  1. SP500 and Russell 2000 = +1.3% each last week to +29.1% and +36.7% YTD, respectively
  2. 10-year US Treasury Yield = +11 basis points to 3.00% (+124 basis points, or +70% YTD = #RatesRising)
  3. US Equity Fear (Volatility) = VIX down another -9.6% last wk to -30.9% YTD #crashing

All the while, underneath the hood, the month-to-date performance across asset classes and investment Style Factors continues to do what it constantly does – change:

  1. SP500 = +1.97% for DEC to-date
  2. Basic Materials (XLB) = +3.81% and Utilities (XLU) = -0.58% DEC to-date, respectively
  3. CRB Commodities Index (19 commodities) = +3.4 and Copper = +5.6% DEC to-date, respectively

In other words, as US #GrowthAccelerating hits its crescendo (rate of change on a 9-12 month basis), market expectations for INFLATION are finally starting to rise again. That’s new.

 

And yes, inflation expectations rising will eventually slow real (inflation adjusted) economic growth. But since the entire edifice of Certainty Forecasting that is Old Wall Street and Washington DC “economics” centrally plan and predict on a lag, threading the needle on when #GrowthSlowing might matter to market expectations is going to be one of the more important things I do.

 

Notwithstanding it’s 1-wk up move on the taper news, it’s important to acknowledge the real-time #GrowthSlowing factor that is the USD falling for 6 of the last 7 weeks. That, in our model, is what is perpetuating the resurgence of inflation expectations. While we were bearish on Commodities for over a year, Mr. Macro Market is telling us to go neutral on that, for now.

 

Got respect for Mr. Macro Market? My process does. This is a short-term market reality, but looking at the 15-day inverse correlation between the CRB Commodities Index and the USD right now, it’s jumping off my screen at -0.94. And with the Euro breaking out versus USD (see our Q413 #EuroBulls Macro Theme), Down Dollar (with taper!) is to be respected by our process as well.

 

Our immediate-term Global Macro Risk Ranges are now (Top 12 ranges are in our Daily Trading Range product):

 

UST 10yr Yield 2.93-3.05%

SPX 1

VIX 11.06-13.83

USD 80.09-80.72

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Trust Your Process - 5Y Breakeven

 

Trust Your Process - 55


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