Russia Stabilizing
Russian fears continue moving toward the back burner as Europe and US bank default risk measures wane. Additional good news is coming from commodity prices, where for the second week in a row they're showing signs of cooling off. The only area of material deterioration week over week was in China's interbank systemic risk, where the Shifon index widened by 113 bps to 3.01%.
Financial Risk Monitor Summary
• Short-term(WoW): Positive / 6 of 13 improved / 2 out of 13 worsened / 5 of 13 unchanged
• Intermediate-term(WoW): Negative / 5 of 13 improved / 5 out of 13 worsened / 3 of 13 unchanged
• Long-term(WoW): Positive / 5 of 13 improved / 3 out of 13 worsened / 5 of 13 unchanged
1. U.S. Financial CDS - Swaps tightened for 24 out of 27 domestic financial institutions. The global banks showed significant week-over-week improvement with the most change coming from BAC, C and MS - all better by 7 bps. The results of DFAST and expectations around CCAR were clearly quite low considering the modest response to a near across-the-boards disappointing result.
Tightened the most WoW: MBI, MET, BAC
Widened the most WoW: MTG, RDN, MMC
Tightened the most WoW: MBI, AGO, UNM
Widened the most/ tightened the least MoM: GS, AXP, ACE
2. European Financial CDS - Swaps mostly tightened in Europe last week, as the banks took their cues from the sovereigns. Clearly the concerns over energy supply disruptions from Russia/Ukraine are shifting toward the back burner. Even Russia's Sberbank cooled off, rising just 1 bp week-over-week.
3. Asian Financial CDS - Most of Asia widened last week as concerns around a general slowdown continue. All but two of the Asian banks we track were wider.
4. Sovereign CDS – Sovereign swaps were generally tighter last week. Portugal, Italy and Spain were the big winners, tightening 21, 14 and 9 bps, respectively. Countries going the wrong way included Japan and France, both 1 bp higher.
5. High Yield (YTM) Monitor – High Yield rates fell 6.2 bps last week, ending the week at 5.74% versus 5.80% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1.0 points last week, ending at 1,854.
7. TED Spread Monitor – The TED spread fell 0.2 basis points last week, ending the week at 18.5 bps this week versus last week’s print of 18.69 bps.
8. CRB Commodity Price Index – The CRB index fell -1.2%, ending the week at 299 versus 303 the prior week. As compared with the prior month, commodity prices have decreased -0.6% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.
9. Euribor-OIS Spread – 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. The Euribor-OIS spread tightened by 1 bps to 13 bps.
10. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 113 basis points last week, ending the week at 3.01% versus last week’s print of 1.88%. 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 -8 bps, ending the week at 67 bps versus 75 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 rose 0.3% last week, or 11 yuan/ton, to 3,265 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 was unchanged at 232 bps. 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 1.1% upside to TRADE resistance and 1.4% downside to TRADE support.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
