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Takeaway: No Gnus is Good Gnus. - Gary Gnu

Key Callouts:

Overall there remains more good news than bad when looking across a host of global Financial risk metrics. Last week we flagged a similar setup and the XLF managed a modest gain of +0.3% on the week. Some of the main callouts from this week's risk monitor are:

* European Financial CDS - Swaps tightened sharply across the European Financials complex last week. The biggest movers were in Greece, Italy, Germany and Spain. The Greek banks have posted impressive M/M moves, dropping by an average of 238 bps in just the last four weeks. Outside of Greece, the only EU banks that are still trading above our so-called "Lehman line" (+300 bps) are Sberbank of Russia.

* 2-10 Spread – Last week the 2-10 spread widened to 231 bps, 4 bps wider than a week ago.  

* CRB Commodity Price Index – The CRB index rose 1.2%, ending the week at 305 versus 301 the prior week. As compared with the prior month, commodity prices have decreased -0.9% 

* TED Spread Monitor – The TED spread rose 1.0 basis points last week, ending the week at 20.5 bps this week versus last week’s print of 19.54 bps.

* High Yield (YTM) Monitor – High Yield rates fell 6.4 bps last week, ending the week at 5.63% versus 5.70% the prior week.

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 / 4 of 13 improved / 4 out of 13 worsened / 5 of 13 unchanged

 • Long-term(WoW): Positive / 5 of 13 improved / 0 out of 13 worsened / 8 of 13 unchanged

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1. U.S. Financial CDS -  MBIA was the sole US Financial to widen on the week, rising 15 bps to 343 bps. JPMorgan was the sole large cap US Financial not to tighten (it was flat w/w at 57 bps). While not as impressive as the move in EU Financials, this past week's tightening across the US FIG complex was decidedly one-way. Overall, swaps tightened for 24 out of 27 domestic financial institutions.

Tightened the most WoW: GNW, MET, PRU

Widened the most/ tightened the least WoW: MBI, JPM, JPM

Tightened the most WoW: GNW, MET, UNM

Widened the most MoM: MBI, AGO, TRV

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2. European Financial CDS - Swaps tightened sharply across the European Financials complex last week. The biggest movers were in Greece, Italy, Germany and Spain. The Greek banks have posted impressive M/M moves, dropping by an average of 238 bps in just the last four weeks. Outside of Greece, the only EU banks that are still trading above our so-called "Lehman line" (+300 bps) are Sberbank of Russia.

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3. Asian Financial CDS - Asian Financials were a mixed bag. India's banks widened across the board by an average of 10 bps. Meanwhile, Chinese and Japanese financials were narrowly changed. 

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4. Sovereign CDS – Sovereign swaps were tighter around the world last week. Italy, Spain and Portugal lead the charge lower, dropping by 24, 19 and 26 bps, respectively. 

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5. High Yield (YTM) Monitor – High Yield rates fell 6.4 bps last week, ending the week at 5.63% versus 5.70% the prior week.

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6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 2.0 points last week, ending at 1857.

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7. TED Spread Monitor – The TED spread rose 1.0 basis points last week, ending the week at 20.5 bps this week versus last week’s print of 19.54 bps.

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8. CRB Commodity Price Index – The CRB index rose 1.2%, ending the week at 305 versus 301 the prior week. As compared with the prior month, commodity prices have decreased -0.9% 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 (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 2 bps to 13 bps.

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10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 20 basis points last week, ending the week at 2.95% versus last week’s print of 2.75%. 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 -5 bps, ending the week at 61 bps versus 66 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 rose 0.5% last week, or 18 yuan/ton, to 3,293 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 231 bps, 4 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 1.7% upside to TRADE resistance and 0.9% downside to TRADE support.

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Joshua Steiner, CFA

Jonathan Casteleyn, CFA, CMT