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European Banking Monitor: Swaps Tighten Substantially On ECB Rate Decision

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

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European Financial CDS - European bank swaps tightened aggressively last week on the heels of the ECB's decision to crank additional stimulus in the Eurozone. The average move was -17 bps (median -10 bps) and was led (again) by Greek banks, which dropped by an average of 82 bps w/w.

 

European Banking Monitor: Swaps Tighten Substantially On ECB Rate Decision   - chart 1 CDS

 

Sovereign CDS – Sovereign swaps tightened around the globe last week. Italy, Portugal, and Spain all compressed by 17-21 bps. The US and Germany were both tighter by one basis point to 16 and 20 bps, respectively. 

 

European Banking Monitor: Swaps Tighten Substantially On ECB Rate Decision   - chart2 sovereign CDS

 

European Banking Monitor: Swaps Tighten Substantially On ECB Rate Decision   - chart 3 sovereign CDS

 

European Banking Monitor: Swaps Tighten Substantially On ECB Rate Decision   - chart 4  sovereign CDS

 

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 was unchanged at 20 bps w/w.

 

European Banking Monitor: Swaps Tighten Substantially On ECB Rate Decision   - chart 5 euribor ois spread

 

 

Matthew Hedrick

Associate

 

Ben Ryan

Analyst

 

 


MONDAY MORNING RISK MONITOR: COMPLACENCY

Takeaway: While the factors in the risk monitor are signaling generally benign conditions, the VIX at 11 is enough to make us uncomfortable.

Current Best Ideas:

 

MONDAY MORNING RISK MONITOR: COMPLACENCY - 19

 

Key Callouts:

Last week saw two major macro events drive a rally across the global Financials complex. The ECB's rate decision and the US jobs report were both big positive catalysts for the group. The 2-10 spread finally showed some signs of life, widening 9 bps to 219 bps. We saw no other indications of rising risk measures in any of the other data we track on a weekly basis.

 

That said, it's important not to get too comfortable in this bull market. As our macro team has pointed out, the VIX at 11 marks a new post-crisis low and that, historically, has been a bearish setup. 


 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 5 of 12 improved / 0 out of 12 worsened / 7 of 12 unchanged

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

 • Long-term(WoW): Negative / 3 of 12 improved / 3 out of 12 worsened / 6 of 12 unchanged

MONDAY MORNING RISK MONITOR: COMPLACENCY - 15

 

1. U.S. Financial CDS -  Largely in response to Friday's jobs report, swaps tightened for 27 out of 27 domestic financial institutions. The mean and median declines were -8 and -6 bps, respectively. The improvement was across the board as the large cap US banks tightened by 8 bps on average, while the specialty finance names were tighter by 12 bps.

 

Tightened the most WoW: GS, MS, JPM

Tightened the least WoW: MMC, UNM, ACE

Tightened the most WoW: GS, MS, C

Tightened the least MoM: WFC, AON, UNM

 

MONDAY MORNING RISK MONITOR: COMPLACENCY - 1

 

2. European Financial CDS - European bank swaps tightened aggressively last week on the heels of the ECB's decision to crank additional stimulus in the Eurozone. The average move was -17 bps (median -10 bps) and was led (again) by Greek banks, which dropped by an average of 82 bps w/w.

 

MONDAY MORNING RISK MONITOR: COMPLACENCY - 2

 

3. Asian Financial CDS - Asian Financial swaps tightened across the board last week as well. Chinese banks swaps were lower by an average of 7 bps, while Indian banks were tighter by 3 bps.

 

MONDAY MORNING RISK MONITOR: COMPLACENCY - 17

 

4. Sovereign CDS – Sovereign swaps tightened around the globe last week. Italy, Portugal and Spain all compressed by 17-21 bps. The US and Germany were both tighter by one basis point to 16 and 20 bps, respectively. 

 

MONDAY MORNING RISK MONITOR: COMPLACENCY - 18

 

MONDAY MORNING RISK MONITOR: COMPLACENCY - 3

 

MONDAY MORNING RISK MONITOR: COMPLACENCY - 4

 

5. High Yield (YTM) Monitor – High Yield rates fell 3.1 bps last week, ending the week at 5.41% versus 5.44% the prior week.

 

MONDAY MORNING RISK MONITOR: COMPLACENCY - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 3 points last week, ending at 1,875.

 

MONDAY MORNING RISK MONITOR: COMPLACENCY - 6

 

7. TED Spread Monitor – The TED spread rose 0.3 basis points last week, ending the week at 19.7 bps this week versus last week’s print of 19.4 bps.

 

MONDAY MORNING RISK MONITOR: COMPLACENCY - 7

 

8. CRB Commodity Price Index – The CRB index fell -0.2%, ending the week at 305 versus 306 the prior week. As compared with the prior month, commodity prices have decreased -0.3% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: COMPLACENCY - 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 was unchanged at 20 bps w/w.

 

MONDAY MORNING RISK MONITOR: COMPLACENCY - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 1 basis points last week, ending the week at 2.58% versus last week’s print of 2.57%. 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: COMPLACENCY - 10

 

11. Chinese Steel – Steel prices in China fell 0.7% last week, or 23 yuan/ton, to 3,210 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: COMPLACENCY - 12

 

12. 2-10 Spread – Last week the 2-10 spread widened to 219 bps, 9 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: COMPLACENCY - 13

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.4% upside to TRADE resistance and 1.7% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: COMPLACENCY - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


MACAU: DECENT START BUT COMP WAS EASY

Over the first 8 days of June, daily table revenues averaged HK$946 million, up 20% over the rate in the comparable week of last year.  We’re hearing about busy Mass floors, decent VIP volumes, and fairly normal hold.

 

However, as we pointed out last week, the first week of June is the easiest comp of the month but week 2 is the most difficult.  Assuming normal hold, next week’s number should be disappointing.  For all of June, we’re projecting GGR to grow only  6-8% YoY.  Decelerating growth at this rate is likely not enough to catalyze the stocks and we remain cautious.  

 

MACAU: DECENT START BUT COMP WAS EASY - macau1

 

MACAU: DECENT START BUT COMP WAS EASY - macau2


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Monday Mashup: DFRG, CAKE, PNRA

Investment Ideas

The table below lists our Investment Ideas as well as our Watch List – a list of potential ideas that we are in the process of evaluating.  We intend to update this table regularly and will provide detail on any material changes.

 

Monday Mashup: DFRG, CAKE, PNRA - 111

 

DFRG We’ve recently added Del Frisco’s Restaurant Group to our Best Ideas list as a short.  We’re hosting a call on Thursday at 11am EST to run through our thesis and field questions.

PNRA We’ve removed Panera Bread Company from our Best Ideas list as a short.

CAKE We’ve removed The Cheesecake Factory from our Best Ideas list as a short.

Recent Notes

06/02/14  Monday Mashup: PLKI, BNNY and More

06/03/14  KKD: Concerns Are Overdone

06/05/14  New Best Idea: Short DFRG

06/06/14  Employment Data Mixed

06/09/14  CAKE: Closing Best Idea Short

06/09/14  PNRA: Closing Best Idea Short

Events This Week

06/09/14  MCD May 2014 Sales and Revenue Release

06/10/14  William Blair Growth Stock Conference: SONC

06/10/14  Piper Jaffray Consumer Conference: CAKE, RUTH, IRG, NDLS, BAGL, FRGI, ZOES

06/11/14  William Blair Growth Stock Conference: BNNY, CMG, SBUX, PBPB

06/11/14  Piper Jaffray Consumer Conference: BBRG, SONC, PLKI, DFRG, DEN

06/12/14  DFRG Hedgeye Best Idea Short Conference Call

06/12/14  William Blair Growth Stock Conference: ZOES, FRSH

06/12/14  TAST Annual General Meeting

Chart of the Day

Del Frisco’s Restaurant Group (DFRG) We continue to believe this stock is disconnected from the fundamentals and have recently added it to our Best Ideas list as a short. 

 

Monday Mashup: DFRG, CAKE, PNRA - 222

Recent News Flow

Monday, June 2nd

  • DENN celebrated 25 years in Puerto Rico and announced plans for its 13th local restaurant that is set to open in Aguadilla in early 2015.
  • DRI Starboard delivered a letter to Darden condemning the Board and withdrawing their request for a Special Meeting.  Starboard remains committed to replacing a majority of the Board.

Tuesday, June 3rd

  • DIN In a move expected to bring 250 jobs to the Guam economy, IHOP signed an agreement with Pacific Pancakes, LLC, to open three restaurants on the Island by 2018. 
  • WEN announced the hiring of Liliana Esposito to Chief Communications Officer.  Esposito previously served as VP, Corporate Communications and Public Affairs, at Dean Foods.

Wednesday, June 4th

  • RT Longbow Research reiterated its buy rating with a $10 PT, citing improving same-store sales driven by improved menu offerings and store designs.
  • WEN introduced a new LTO – the Strawberry Fields Chicken Salad.  According to the company, the new salad “serves up hand-sliced California strawberries, savory Applewood Smoked bacon, crumbled blue cheese and freshly slice red onion in every forkful.”  The salad has a suggested price of $4.49 and $6.49 for the half-size and full-size, respectively.
  • DNKN announced it surpassed one million DD Perks Reward Program members after launching nationwide earlier this year.

Thursday, June 5th

  • PNRA announced 100% franchise commitment to Panera 2.0.  The full 2.0 system is expected to be rolled out to approximately 100 cafes by year end.  Panera also announced a new three-year, $600M share repurchase program.
  • CAKE announced the opening of its newest restaurant in Lenox Square Atlanta.  The restaurant is approximately 8,700 square feet in size and accommodates 215 guests.

Friday, June 6th

  • DFRG Buckingham Research initiated coverage of Del Frisco’s with a buy rating and $35 PT.

US Macro Consumption

The XLY (+1.9%) outperformed the SPX (+1.3%) last week, as both casual dining and quick service stocks outperformed the narrower XLY index.

 

Monday Mashup: DFRG, CAKE, PNRA - 333

Monday Mashup: DFRG, CAKE, PNRA - 444

XLY Quantitative Setup

Monday Mashup: DFRG, CAKE, PNRA - 555

Casual Dining Restaurants

Monday Mashup: DFRG, CAKE, PNRA - 666

Monday Mashup: DFRG, CAKE, PNRA - 777

Quick Service Restaurants

Monday Mashup: DFRG, CAKE, PNRA - 888

Monday Mashup: DFRG, CAKE, PNRA - 999

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst



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