Current Best Ideas:
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
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
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.
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.
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.
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.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 3 points last week, ending at 1,875.
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.
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.
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.
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.
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.
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.
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.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT