Summary: Last week we flagged rising commodity prices as the single thorn in the side of the ongoing rally/recovery in US Financials. This week that thorn was pulled out as commodity prices dropped 2.2% in the latest week bringing the month-over-month change to a decline of 0.4%. Elsewhere, the US yield spread continues to widen while default probabilities continue to fall. The noted backup in European interbank risk we flagged last week also cooled off as Euribor-OIS dropped 1 bp this week.
On a short-term basis, we see improvement outpacing decline by a ratio of 5 to 1 across our various risk measures, while on an intermediate term basis, improvement is leading decline by 5 to 3.
Financial Risk Monitor Summary
• Short-term(WoW): Positive / 5 of 13 improved / 1 out of 13 worsened / 7 of 13 unchanged
• Intermediate-term(WoW): Positive / 5 of 13 improved / 3 out of 13 worsened / 5 of 13 unchanged
• Long-term(WoW): Positive / 3 of 13 improved / 1 out of 13 worsened / 9 of 13 unchanged
1. U.S. Financial CDS - Sallie Mae and Radian put up good weeks, as swaps tightened by 13 and 10 bps, respectively. Elsewhere in the US there was relatively little w/w action, though the bond guarantors did see their swaps widen slightly.
Tightened the most WoW: SLM, WFC, RDN
Widened the most WoW: TRV, AGO, HIG
Tightened the most WoW: PRU, WFC, LNC
Widened the most/ tightened the least MoM: AGO, MBI, CB
2. European Financial CDS - Most of Europe's banks saw their swaps tighten last week but Greek banks were notably wider with Alpha Bank and National Bank of Greece tacking on 24 and 38 bps, respectively. Italian banks continue to show the greatest improvement on a month-over-month basis.
3. Asian Financial CDS - Another mixed week for Asian Financial swaps. Indian banks reversed what had been a trend of steady improvement, rising an average of 16 bps last week while Chinese bank swaps were essentially unchanged.
4. Sovereign CDS – Sovereign swaps tightened across the board last week. Portuguese, Italian and Spanish swaps tightened the most, falling 29, 21 and 19 bps, respectively.
5. High Yield (YTM) Monitor – High Yield rates rose 3.2 bps last week, ending the week at 6.01% versus 5.98% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 4.0 points last week, ending at 1840.
7. TED Spread Monitor – The TED spread fell 1.2 basis points last week, ending the week at 17.2 bps this week versus last week’s print of 18.36 bps.
8. CRB Commodity Price Index – The CRB index fell -2.2%, ending the week at 277 versus 283 the prior week. As compared with the prior month, commodity prices have decreased -0.4% 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 1 bps to 13 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 38 basis points last week, ending the week at 3.13% versus last week’s print of 3.51%. 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 bp, ending the week at 88 bps versus 89 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 0.5% last week, or 16 yuan/ton, to 3,491 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 to 260 bps, -1 bp tighter than a week ago. We track the 2-10 spread as an indicator of bank margin directionality.
14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.9% upside to TRADE resistance and 2.1% downside to TRADE support.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT