Current Best Ideas:
Key Callouts:
There was a fair amount of movement in this week's Risk Monitor, especially in Europe where bank swaps tightened further, falling by an average of 8 bps w/w.
*European Financial CDS – Almost all European swaps tightened last week. Most of the 31 swaps that tightened did so by a notable amount. On average, Belgian swaps tightened by 15 bps, German by 6 bps, Greek by 31 bps, Italian by 7 bps, Portuguese by 11 bps, and Russian by 26. Only Hannover Rueckversicherung, National Bank of Greece, and DNB widened at all, and by only 1, 3, and 2 bps, respectively.
*High Yield (YTM) Monitor – High Yield rates fell 4.9 bps last week, ending the week at 5.53% versus 5.58% the prior week.
*Euribor-OIS Spread – The Euribor-OIS spread widened by 1 bps to 17 bps. For reference, Euribor-OIS is now 4 bps wider m/m.
*2-10 Spread – Last week the 2-10 spread widened to 224 bps, 8 bps wider than a week ago.
*Chinese Interbank Rate (Shifon Index) – The Shifon Index fell 27 basis points last week, ending the week at 2.23% versus last week’s print of 2.5%. 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 / 5 of 12 improved / 1 out of 12 worsened / 6 of 12 unchanged
• Intermediate-term(WoW): Positive / 6 of 12 improved / 1 out of 12 worsened / 5 of 12 unchanged
• Long-term(WoW): Positive / 4 of 12 improved / 2 out of 12 worsened / 6 of 12 unchanged
1. U.S. Financial CDS – Swaps tightened for 14 out of 27 domestic financial institutions. The Global US banks saw little change, with only Morgan Stanley moving by more than one basis point, widening from 71 last week to 73 this week. The specialty finance companies we track were tighter on the week and on the month with the largest move coming from mortgage insurer MTG (-10 bps). The US insurers were little changed aside from GNW, where swaps widened out 7 bps over the week.
Tightened the most WoW: AXP, COF, MTG
Widened the most WoW: GNW, AIG, ACE
Tightened the most WoW: PRU, AGO, MTG
Widened the most/ tightened the least MoM: BAC, SLM, ALL
2. European Financial CDS – Almost all European bank swaps tightened last week. Most of the 31 swaps that tightened did so by a notable amount. On average, Belgian swaps tightened by 15 bps, German by 6 bps, Greek by 31 bps, Italian by 7 bps, Portuguese by 11 bps, and Russian by 26. Only Hannover Rueckversicherung, National Bank of Greece, and DNB widened, and by just 1, 3, and 2 bps, respectively.
3. Asian Financial CDS – Last week Chinese banks tightened marginally, by an average of 1 bps. Most Japanese banks saw no change over the week, with only Mizuho widening by 3 bps. All Indian swaps widened, by an average of 3 bps w/w.
4. Sovereign CDS – Sovereign swaps mostly tightened over last week. Portuguese sovereign swaps tightened by -8.6% (-14 bps to 153 ) and US sovereign swaps tightened by -3.4% (1 bps to 17).
5. High Yield (YTM) Monitor – High Yield rates fell 4.9 bps last week, ending the week at 5.53% versus 5.58% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 4.0 points last week, ending at 1866.
7. TED Spread Monitor – The TED spread fell 0.4 basis points last week, ending the week at 20.1 bps this week versus last week’s print of 20.49 bps.
8. CRB Commodity Price Index – The CRB index fell -1.6%, ending the week at 305 versus 310 the prior week. As compared with the prior month, commodity prices have decreased -1.8% 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 widened by 1 bps to 17 bps.
10. Chinese Interbank Rate (Shifon Index) – The Shifon Index fell 27 basis points last week, ending the week at 2.23% versus last week’s print of 2.5%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.
11. Chinese Steel – Steel prices in China fell 0.8% last week, or 27 yuan/ton, to 3310 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.
12. 2-10 Spread – Last week the 2-10 spread widened to 224 bps, 8 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.
13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.0% upside to TRADE resistance and 1.6% downside to TRADE support.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT