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Takeaway: Last week saw modest widening in interbank risk measures domestically and in Europe as well as further upward commodity inflation pressure.

Key Callouts:

Looking at the Risk Monitor, we see tightening in US, European, and Sovereign swaps, a change from the slight widening seen in the previous week. On the interbank risk front, the US TED Spread rose 1 bp, Euribor-OIS rose 2 bps and China's Shifon Index fell 57 basis points. Overall, none of those datapoints are terribly exciting, but the +2 bps move in Euribor bears watching going forward.

* U.S. Financial CDS - Swaps tightened for 18 out of 27 domestic financial institutions. The Global US banks were all tighter, by an average of 4 bps w/w, as well as 4 bps on a m/m basis. The specialty finance companies we track were tighter on the week and on the month with the biggest moves coming from the mortgage insurers, MTG & RDN and Sallie Mae. The US insurers were little changed aside from the bond guarantor MBIA, where swaps widened out 20 bps w/w and 126 bps m/m.

* European Financial CDS – Most swaps tightened marginally in Europe last week. The Greek banks continue to tighten notably, dropping an average of 15 bps in the past week and 195 bps in the past month. Russia’s Sberbank widened by 20 bps this past week; however, the bank remains tighter on the month by 24 bps.

* Sovereign CDS – Sovereign swaps either tightened or remained the same over the past week. Japanese sovereign swaps tightened by 4.9% (2 bps to 46) and US sovereign swaps tightened by 4.8% (1 bps to 17).

* Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 57 basis points last week, ending the week at 2.18% 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.

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 3 of 12 improved / 1 out of 12 worsened / 8 of 12 unchanged

 • Intermediate-term(WoW): Positive / 7 of 12 improved / 3 out of 12 worsened / 2 of 12 unchanged

 • Long-term(WoW): Positive / 4 of 12 improved / 1 out of 12 worsened / 7 of 12 unchanged

MONDAY MORNING RISK MONITOR: COMMODITIES & INTERBANK RISK MEASURES RISE - 15 2

1. U.S. Financial CDS -  Swaps tightened for 18 out of 27 domestic financial institutions. The Global US banks were all tighter, by an average of 4 bps w/w, and 5 bps on a m/m basis. The specialty finance companies we track were tighter on the week and on the month with the biggest moves coming from the mortgage insurers, MTG & RDN and Sallie Mae. The US insurers were little changed aside from the bond guarantor MBIA, where swaps widened out 20 bps w/w and 126 bps m/m.

Tightened the most WoW: C, XL, MS

Widened the most WoW: MBI, CB, ACE

Tightened the most WoW: MS, GNW, AIG

Widened the most MoM: MBI, TRV, SLM

MONDAY MORNING RISK MONITOR: COMMODITIES & INTERBANK RISK MEASURES RISE - 1

2. European Financial CDS – Most swaps tightened marginally in Europe last week. The Greek banks continue to tighten notably, dropping an average of 15 bps in the past week and 195 bps in the past month. Russia’s Sberbank widened by 20 bps this past week; however, the bank remains tighter on the month by 24 bps.

MONDAY MORNING RISK MONITOR: COMMODITIES & INTERBANK RISK MEASURES RISE - 2

3. Asian Financial CDS – It was a mixed bag for Asian financials last week as Chinese and Indian banks widened nominally, while Japanese financials tightened by an average of 1.75 bps w/w.

MONDAY MORNING RISK MONITOR: COMMODITIES & INTERBANK RISK MEASURES RISE - 17

4. Sovereign CDS – Sovereign Swaps either tightened or remained the same over the past week. Japanese sovereign swaps tightened by 4.9% (2 bps to 46) and US sovereign swaps tightened by 4.8% (1 bps to 17).

MONDAY MORNING RISK MONITOR: COMMODITIES & INTERBANK RISK MEASURES RISE - 18

MONDAY MORNING RISK MONITOR: COMMODITIES & INTERBANK RISK MEASURES RISE - 3

MONDAY MORNING RISK MONITOR: COMMODITIES & INTERBANK RISK MEASURES RISE - 4

5. High Yield (YTM) Monitor – High Yield rates fell 1.4 bps last week, ending the week at 5.63% versus 5.65% the prior week.

MONDAY MORNING RISK MONITOR: COMMODITIES & INTERBANK RISK MEASURES RISE - 5

6. Leveraged Loan Index Monitor – The Leveraged Loan Index was unchanged last week at 1855.

MONDAY MORNING RISK MONITOR: COMMODITIES & INTERBANK RISK MEASURES RISE - 6

7. TED Spread Monitor – The TED spread rose 1.3 basis points last week, ending the week at 20.1 bps this week versus last week’s print of 18.85 bps.

MONDAY MORNING RISK MONITOR: COMMODITIES & INTERBANK RISK MEASURES RISE - 7

8. CRB Commodity Price Index – The CRB index rose 0.6%, ending the week at 311 versus 310 the prior week. As compared with the prior month, commodity prices have increased 2.8% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR: COMMODITIES & INTERBANK RISK MEASURES RISE - 8

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 widened by 2 bps to 15 bps.

MONDAY MORNING RISK MONITOR: COMMODITIES & INTERBANK RISK MEASURES RISE - 9

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 45 basis points last week, ending the week at 2.298% 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.

MONDAY MORNING RISK MONITOR: COMMODITIES & INTERBANK RISK MEASURES RISE - 10

11. Chinese Steel – Steel prices in China rose 0.5% last week, or 16 yuan/ton, to 3383 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

MONDAY MORNING RISK MONITOR: COMMODITIES & INTERBANK RISK MEASURES RISE - 12

12. 2-10 Spread – Last week the 2-10 spread widened to 233 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: COMMODITIES & INTERBANK RISK MEASURES RISE - 13

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.6% upside to TRADE resistance and 2.8% downside to TRADE support.

MONDAY MORNING RISK MONITOR: COMMODITIES & INTERBANK RISK MEASURES RISE - 14

Joshua Steiner, CFA

Jonathan Casteleyn, CFA, CMT