Summary:
Last week we flagged the rising Euribor-OIS and TED spread as areas of concern. Historically these have been solid indicators that the market is moving from a risk on to risk off mentality and it's our view that it's best to stand aside when these gauges of interbank systemic risk are rising. It would appear for now that that widening may have proved short-lived as both gauges have this week returned to generally benign levels. That said, we're not quite comfortable sounding the "all clear" signal just yet. For one thing, VIX levels remain elevated and for another, we think the EM scare that initially prompted the nervousness is unlikely to have blown over just as quickly as it emerged. With our Macro team’s quantitative setup in the XLF showing just 1.9% upside to TRADE resistance and 4.1% downside to TRADE support, we think it makes sense to wait and watch at this juncture.
Key Points:
* 2-10 Spread – Last week the 2-10 spread widened to 238 bps, 6 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 tightened by 3 bps to 13 bps.
* CRB Commodity Price Index – The CRB index rose 1.9%, ending the week at 290 versus 284 the prior week. As compared with the prior month, commodity prices have increased 6.4% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.
* TED Spread – The TED spread fell 6.4 basis points last week, ending the week at 15 bps this week versus last week’s print of 21.36 bps.
Financial Risk Monitor Summary
• Short-term(WoW): Positive / 7 of 13 improved / 2 out of 13 worsened / 4 of 13 unchanged
• Intermediate-term(WoW): Negative / 2 of 13 improved / 9 out of 13 worsened / 2 of 13 unchanged
• Long-term(WoW): Positive / 5 of 13 improved / 0 out of 13 worsened / 8 of 13 unchanged
1. U.S. Financial CDS - US Banks and non-bank Financials were almost universally tighter last week with the modest exceptions of Sallie Mae (+2 bps) and Travelers (+5 bps). The large cap US banks were all tighter, with MS, C and BAC tightening by 10-11 bps while GS and JPM tightened by 9 and 8 bps, respectively.
Tightened the most WoW: C, BAC, GNW
Widened the most WoW: TRV, SLM, MET
Tightened the most WoW: AGO, MBI, MTG
Widened the most MoM: TRV, MET, AIG
2. European Financial CDS - Outside of Greece, most of Europe's banking system saw swaps tighten last week. Spanish, Italian and French banks led the charge lower, followed closely by Germany's banks. Greek banks were wider by ~30 bps on a w/w basis.
3. Asian Financial CDS - Chinese and Indian banks posted modest w/w tightening in swaps, while Japanese Financials were essentially unchanged.
4. Sovereign CDS – Sovereign swaps were tighter across the globe last week with the exception of Germany, where they widened by one basis point.
5. High Yield (YTM) Monitor – High Yield rates were unchanged last week at 6.02%, but are up 7 bps vs the previous month.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1.0 points last week, ending at 1848.
7. TED Spread – The TED spread fell 6.4 basis points last week, ending the week at 15 bps this week versus last week’s print of 21.36 bps.
8. CRB Commodity Price Index – The CRB index rose 1.9%, ending the week at 290 versus 284 the prior week. As compared with the prior month, commodity prices have increased 6.4% 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 3 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 ended the week at 4.44%, up 164 bps month-over-month. 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 -3 bps, ending the week at 87 bps versus 90 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 ended the week at 3,393 yuan/ton, which is down 57 yuan/ton on a month-over-month basis (-1.7%). 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 238 bps, 6 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 1.9% upside to TRADE resistance and 4.1% downside to TRADE support.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
