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Takeaway: While the S&P 500 and XLF have risen from their early February lows, we prefer to wait for more tangible signs of underlying improvement.

Summary:

Every week we try and take a step back and ask a big-picture, simple question: is the risk environment rising or falling for Financials investors? A few weeks back we argued that it had begun rising. This morning we see in the data a continuation of that trend. This week we highlight four categories, three of which are showing further signs of worsening, while one is improving. The three areas of growing concern are the TED Spread, Euribor-OIS and the CRB Index. The one area of improvement is the 2-10 spread. For now, we continue to prefer to remain on the sidelines as we wait, in particular, for the green light from the systemic, interbank risk measures.

Key Points:

* 2-10 Spread – Last week the 2-10 spread widened to 243 bps, 5 bps wider than a week ago. 

* Euribor-OIS Spread – The Euribor-OIS spread widened by 2 bps to 15 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. 

* TED Spread Monitor – The TED spread rose 7.1 basis points last week, ending the week at 22.1 bps this week versus last week’s print of 14.99 bps.

* CRB Commodity Price Index – The CRB index rose 2.1%, ending the week at 293 versus 287 the prior week. As compared with the prior month, commodity prices have increased 5.3% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 6 of 13 improved / 4 out of 13 worsened / 3 of 13 unchanged

 • Intermediate-term(WoW): Negative / 0 of 13 improved / 7 out of 13 worsened / 6 of 13 unchanged

 • Long-term(WoW): Positive / 3 of 13 improved / 1 out of 13 worsened / 9 of 13 unchanged

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1. U.S. Financial CDS -  Swaps tightened for 27 out of 27 domestic financial institutions. The US large cap banks were all tighter last week with BAC putting up the best w/w performance. Overall, however, the strongest relative improvements came from the US insurers. 

Tightened the most WoW: TRV, PRU, MBI

Tightened the least WoW: AON, MMC, AXP

Tightened the most WoW: AGO, MBI, PRU

Widened the most MoM: C, SLM, MET

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2. European Financial CDS - With the narrow exception of Greece, European banks were broadly tighter last week. Europe's banks are now generally showing progress on a month-over-month basis.  

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3. Asian Financial CDS - Most of Asia's Financials were tighter last week, though with a few notable exceptions such as IDB Bank of India (+32 bps).

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4. Sovereign CDS – Sovereign swaps were mixed last week with the US showing the largest percentage change with a 3 bps tightening, while Spain saw its swaps widen by 5 bps. Overall, it was a fairly quiet week. 

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5. High Yield (YTM) Monitor – High Yield rates fell 15 bps last week, ending the week at 5.86% versus 6.02% the prior week.

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6. Leveraged Loan Index Monitor – The Leveraged Loan Index was unchanged last week at 1848.

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7. TED Spread Monitor – The TED spread rose 7.1 basis points last week, ending the week at 22.1 bps this week versus last week’s print of 14.99 bps.

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8. CRB Commodity Price Index – The CRB index rose 2.1%, ending the week at 293 versus 287 the prior week. As compared with the prior month, commodity prices have increased 5.3% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

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9. Euribor-OIS Spread – The Euribor-OIS spread widened by 2 bps to 15 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. 

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10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 60 basis points last week, ending the week at 3.67% versus last week’s print of 4.27%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

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11. Markit MCDX Index Monitor – Last week spreads tightened 10 bps, ending the week at 77 bps versus 87 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.

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12. Chinese Steel – Steel prices in China fell 1.6% last week, or 56 yuan/ton, to 3348 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

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13. 2-10 Spread – Last week the 2-10 spread widened to 243 bps, 5 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

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14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.4% upside to TRADE resistance and 1.2% downside to TRADE support.

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Joshua Steiner, CFA

Jonathan Casteleyn, CFA, CMT