Current Best Ideas:
The two notable callouts this week are commodity prices and interbank rates. Commodity prices rose a further 2.5% last week, which follows the prior week's 2% increase. Interbank rates in the US, meanwhile, rose noticeably on the week.
* The CRB index rose 2.5%, ending the week at 313 versus 305 the prior week.
* The TED spread rose 1.9 basis points last week, ending the week at 21.8 bps this week versus last week’s print of 19.91 bps.
Financial Risk Monitor Summary
• Short-term(WoW): Negative / 2 of 12 improved / 5 out of 12 worsened / 5 of 12 unchanged
• Intermediate-term(WoW): Positive / 6 of 12 improved / 5 out of 12 worsened / 1 of 12 unchanged
• Long-term(WoW): Negative / 3 of 12 improved / 4 out of 12 worsened / 5 of 12 unchanged
1. U.S. Financial CDS - Assured and MBIA were sharply tighter on the week, -45 bps and -38 bps, respectively. Outside of the guarantors, however, there was relatively little action in the CDS market for US financials last week. Overall, the median change was 0 bps.
Tightened the most WoW: AGO, MBI, AIG
Widened the most WoW: XL, UNM, TRV
Tightened the most WoW: AGO, GS, MS
Widened the most/ tightened the least MoM: WFC, XL, RDN
2. European Financial CDS - Swaps widened almost across the board in Europe last week. Sberbank of Russia was one of the few exceptions, tightening 8 bps w/w. The Greek banks were wider by an average of 36 bps w/w. Overall, swaps widened by a median of 2 bps on the week.
3. Asian Financial CDS - Indian banks were wider on the week (+6-7 bps), while Japanese and Chinese banks were mixed.
4. Sovereign CDS – Sovereign swaps widened globally last week with the largest increases coming from Italy (+6 bps) and France (+4 bps).
5. High Yield (YTM) Monitor – High Yield rates fell 6.1 bps last week, ending the week at 5.30% versus 5.37% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1 point last week, ending at 1,879.
7. TED Spread Monitor – The TED spread rose 1.9 basis points last week, ending the week at 21.8 bps this week versus last week’s print of 19.91 bps.
8. CRB Commodity Price Index – The CRB index rose 2.5%, ending the week at 313 versus 305 the prior week. As compared with the prior month, commodity prices have increased 1.7% 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 tightened by 4 bps to 16 bps.
10. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 10 basis points last week, ending the week at 2.70% versus last week’s print of 2.60%. 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 1.3% last week, or 40 yuan/ton, to 3,137 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 tightened to 215 bps, -1 bps tighter 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 0.7% upside to TRADE resistance and 1.5% downside to TRADE support.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT