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European Banking Monitor: Calmer Than A Week Ago But Still Uncertain

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 - 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.

 

European Banking Monitor: Calmer Than A Week Ago But Still Uncertain - v.banks

 

Sovereign CDS – Sovereign swaps were tighter across the globe last week with the exception of Germany, where they widened by one basis point. 

 

European Banking Monitor: Calmer Than A Week Ago But Still Uncertain - v.sov1

 

European Banking Monitor: Calmer Than A Week Ago But Still Uncertain - v.sov2

 

European Banking Monitor: Calmer Than A Week Ago But Still Uncertain - v.sov3

 

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. 

 

European Banking Monitor: Calmer Than A Week Ago But Still Uncertain - v.euribor

 

 

Matthew Hedrick 

Associate


MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN

Takeaway: Waiting and watching for now while the EM situation shows greater signs of clarity.

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

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 15

 

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

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 1

 

 

 

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.

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 2

 

3. Asian Financial CDS - Chinese and Indian banks posted modest w/w tightening in swaps, while Japanese Financials were essentially unchanged. 

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 17

 

4. Sovereign CDS – Sovereign swaps were tighter across the globe last week with the exception of Germany, where they widened by one basis point. 

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 18

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 3

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 4

 

5. High Yield (YTM) Monitor – High Yield rates were unchanged last week at 6.02%, but are up 7 bps vs the previous month. 

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1.0 points last week, ending at 1848.

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 6

 

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.

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 7

 

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.

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 8

 

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. 

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 9

 

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.

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 10

 

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.

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 11

 

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.

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 12

 

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.

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 13

 

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.

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Reality Burns: Kevin Kaiser Keeps $BWP as a Hedgeye Best Idea Short

Takeaway: Kevin Kaiser nails it on the short side. Again.

In case you were wondering what that terrible, smoky smell is this morning, shares of Boardwalk Pipeline Partners (BWP) are getting incinerated. They are down over 38% as of this writing.

 

Hedgeye Energy Analyst Kevin Kaiser added BWP as a SHORT to our Best Ideas list on December 2, 2013.

 

The stock is down over 42% since then.

 

It pays to listen to Kaiser.

 

Reality Burns: Kevin Kaiser Keeps $BWP as a Hedgeye Best Idea Short - kk8

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Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.


How Cool Is This New $AMZN App?

Takeaway: Amazon nails it (again).

Point Your iPhone at Something You Like, Amazon’s New App Buys It

 

Excerpt from Wired

  • "Today, Amazon is announcing a new feature inside its mobile shopping app that lets you scan items in your home using your smartphone’s camera and quickly order all of your packaged goods online. The new feature, called Flow, will be available inside Amazon’s shopping app for iOS. It’s iPhone-only for now, and the company isn’t saying when it will arrive on other smartphone platforms, or on the Kindle Fire."
  • "Instead of taking a photo of an item or scanning a barcode, Flow recognizes items via their shape, size, color, box text, and general appearance. Hold your iPhone up to a row of items on your shelf or counter, and within seconds of “seeing” it with the iPhone’s camera, every recognizable item is placed in queue that can be added to your Amazon cart."

How Cool Is This New $AMZN App? - amznboom

 

Takeaway from Hedgeye Retail Analyst Brian McGough: How cool is this new app? Look, whether you're a fan of Amazon or not, you can't help but admit that they are technologically leaps and bounds above anyone else out there. Of course, all the innovations they cook up might not stick, but we want a company we invest in to be innovating in every way imaginable. No one does it better than AMZN. And as it relates to this innovation…#nobrainer

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Smoking Dollar Implications

Client Talking Points

US DOLLAR

While U.S. stocks had their low-volume bounce to lower-highs on Friday, the real read-through on the jobs report was the US Dollar getting smoked. The greenback has moved back to bearish TREND in our model and was down -0.8% on the week. No bid again this morning. Meanwhile, the Euro and Pound continue to look stronger, as does European growth data, on the margin. We have been bullish on both, in particular the Pound.

OIL

A big rip in Oil inflation on the payroll miss. Brent was up +3% on the week and, more importantly, back to bullish TREND in our Hedgeye model. This is occurring alongside a commodity complex (CRB Index) that continues to crush any US stock index year-to-date (CRB up another +2.3% last week – CRB Food Index = +4.5% YTD). Inflation? It's a tax.

RUSSELL 2000

It was fun to watch the SPX bounce +0.5% to -2.8% year-to-date last week, but the Russell had zero fun. It was down another -1.3% to -4% year-to-date as #InflationAcclerating slows US growth expectations. The 10-year yield of 2.66% this morning continues to signal the same on growth.

Asset Allocation

CASH 50% US EQUITIES 3%
INTL EQUITIES 5% COMMODITIES 16%
FIXED INCOME 10% INTL CURRENCIES 16%

Top Long Ideas

Company Ticker Sector Duration
FXB

We remain bullish on the British Pound versus the US Dollar, a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve) and the Bank maintaining its existing asset purchase program (QE). UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which should provide further strength to the currency. In short, we believe a strengthening UK economy coupled with the comparative hawkishness of the BOE (vs. Yellen et al.) will further perpetuate #StrongPound over the intermediate term.

DRI

Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.

JPM

JPMorgan shares are currently trading with the most implied upside to fair value in our fair value model for money-center, super-regional and regional bank stocks. By our estimates, JPM shares have upside of 33% based on our regression of EVA (economic value added) – which looks at the spread between return on capital and cost of capital – and the current multiple to tangible book value. Over time, we have found that sizeable discounts and premiums mean revert toward fair value giving JPMorgan an embedded tailwind in 2014.

Three for the Road

TWEET OF THE DAY

GOLD: up another +0.5% to +5.5% YTD - Down Rates, Down Dollar = Inflation Slowing growth @KeithMcCullough

QUOTE OF THE DAY

"If you deliberately set out to be less than you are capable, you'll be unhappy for the rest of your life." - Abraham Maslow

STAT OF THE DAY

For the first time in over 20 years, rates on jumbo mortgages -- loans of more than $417,000, or $625,500 in pricier areas -- are at or below rates on conventional mortgages. Jumbo rates usually run one-quarter to one-half of a percentage point higher, but lenders eager for wealthier customers are making deals. (CNN)


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.33%
  • SHORT SIGNALS 78.51%
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