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Takeaway: Euribor-OIS has been quietly creeping higher for the past month. Historically, this has been an important risk measure to keep an eye on.

Current Best Ideas:

TUESDAY MORNING RISK MONITOR:  EURIBOR-OIS CLIMBING SLOWLY BUT STEADILY - 19

Key Callouts:

The pre-holiday week saw yield spreads widen modestly (+3 bps) and European interbank systemic risk measures rise further.

* 2-10 Spread – Last week the 2-10 spread widened to 219 bps, 3 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

* Euribor-OIS Spread – The Euribor-OIS spread widened by 1 bps to 20 bps, continuing the directional trend that's been in place for the past month. 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. 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 1 of 12 improved / 5 out of 12 worsened / 6 of 12 unchanged

 • Intermediate-term(WoW): Positive / 5 of 12 improved / 4 out of 12 worsened / 3 of 12 unchanged

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

TUESDAY MORNING RISK MONITOR:  EURIBOR-OIS CLIMBING SLOWLY BUT STEADILY - 15

1. U.S. Financial CDS -  Swaps were fairly uneventful for the most part last week across the US Financials. That said, there were notable moves (wider) in the mortgage insurers and (tighter) in the bond guarantors. 

Tightened the most WoW: AGO, MBI, AXP

Widened the most WoW: UNM, HIG, CB

Tightened the most WoW: AGO, MBI, MET

Widened the most MoM: BAC, GNW, MMC

TUESDAY MORNING RISK MONITOR:  EURIBOR-OIS CLIMBING SLOWLY BUT STEADILY - 1

2. European Financial CDS - Swaps were little changed in Europe last week, though a big move came at Russia's Sberbank where spreads tightened by 30 bps w/w and are now tighter by 63 bps m/m.

TUESDAY MORNING RISK MONITOR:  EURIBOR-OIS CLIMBING SLOWLY BUT STEADILY - 2

3. Asian Financial CDS - Indian banks put on another impressive display of tightening, compressing by an average 21 bps w/w and are now tighter by 66 bps, on average, m/m. Japanese and Chinese banks were narrowly wider on the week.

TUESDAY MORNING RISK MONITOR:  EURIBOR-OIS CLIMBING SLOWLY BUT STEADILY - 17

4. Sovereign CDS – Sovereign swaps were wider across the board last week except for in the US, where they tightened 1 basis point. Portugal and Italy led the charge higher, rising by 16 and 8 bps, respectively. 

TUESDAY MORNING RISK MONITOR:  EURIBOR-OIS CLIMBING SLOWLY BUT STEADILY - 18

TUESDAY MORNING RISK MONITOR:  EURIBOR-OIS CLIMBING SLOWLY BUT STEADILY - 3

TUESDAY MORNING RISK MONITOR:  EURIBOR-OIS CLIMBING SLOWLY BUT STEADILY - 4

5. High Yield (YTM) Monitor – High Yield rates rose 1.3 bps last week, ending the week at 5.53% versus 5.51% the prior week.

TUESDAY MORNING RISK MONITOR:  EURIBOR-OIS CLIMBING SLOWLY BUT STEADILY - 5

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1.0 points last week, ending at 1870.

TUESDAY MORNING RISK MONITOR:  EURIBOR-OIS CLIMBING SLOWLY BUT STEADILY - 6

7. TED Spread Monitor – The TED spread fell 1.5 basis points last week, ending the week at 19.6 bps this week versus last week’s print of 21.06 bps.

TUESDAY MORNING RISK MONITOR:  EURIBOR-OIS CLIMBING SLOWLY BUT STEADILY - 7

8. CRB Commodity Price Index – The CRB index rose 0.1%, ending the week unchanged at 308 vs the prior week. As compared with the prior month, commodity prices have decreased -1.3% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

TUESDAY MORNING RISK MONITOR:  EURIBOR-OIS CLIMBING SLOWLY BUT STEADILY - 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 1 bps to 20 bps.

TUESDAY MORNING RISK MONITOR:  EURIBOR-OIS CLIMBING SLOWLY BUT STEADILY - 9

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 14 basis points last week, ending the week at 2.51% versus last week’s print of 2.37%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

TUESDAY MORNING RISK MONITOR:  EURIBOR-OIS CLIMBING SLOWLY BUT STEADILY - 10

11. Chinese Steel – Steel prices in China fell 1.1% last week, or 37 yuan/ton, to 3,221 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

TUESDAY MORNING RISK MONITOR:  EURIBOR-OIS CLIMBING SLOWLY BUT STEADILY - 12

12. 2-10 Spread – Last week the 2-10 spread widened to 219 bps, 3 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

TUESDAY MORNING RISK MONITOR:  EURIBOR-OIS CLIMBING SLOWLY BUT STEADILY - 13

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.0% upside to TRADE resistance and 0.6% downside to TRADE support.

TUESDAY MORNING RISK MONITOR:  EURIBOR-OIS CLIMBING SLOWLY BUT STEADILY - 14

Joshua Steiner, CFA

Jonathan Casteleyn, CFA, CMT