Current Best Ideas:
* European Financial CDS - Swaps were generally wider across the board in Europe's banking system, but were acutely wider in Portugal. Portugal's largest bank, Banco Espirito Santo, is being probed by Luxembourg's justice department. The swaps widened to 318 bps (+130 bps w/w).
* 2-10 Spread – Last week the 2-10 spread tightened to 207 bps, -8 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.
Financial Risk Monitor Summary
• Short-term(WoW): Negative / 0 of 12 improved / 6 out of 12 worsened / 6 of 12 unchanged
• Intermediate-term(WoW): Negative / 4 of 12 improved / 5 out of 12 worsened / 3 of 12 unchanged
• Long-term(WoW): Negative / 3 of 12 improved / 5 out of 12 worsened / 4 of 12 unchanged
1. U.S. Financial CDS - Swaps widened for 21 out of 27 domestic financial institutions. The Global US Banks were wider by an average of 5 bps on the week while the bond guarantors, MBIA and Assured, widened by 97 and 59 bps, respectively, on the week. Mortgage insurers, MGIC and Radian, also widened on the week by 5 and 17 bps, respectively.
Tightened the most WoW: TRV, SLM, MMC
Widened the most WoW: MBI, AGO, MET
Tightened the most WoW: ALL, TRV, GS
Widened the most MoM: WFC, MBI, HIG
2. European Financial CDS - Swaps were generally wider across the board in Europe's banking system, but were acutely wider in Portugal. Portugal's largest bank, Banco Espirito Santo, is being probed by Luxembourg's justice department. The swaps widened to 318 bps (+130 bps w/w).
3. Asian Financial CDS - Bank swaps across Asia were flat to wider last week rising an average 3 bps. Chinese banks saw the largest w/w increase, while Japanese swaps were little changed.
4. Sovereign CDS – Sovereign swaps were generally little-changed on the week, though Portugal was +9 bps to 154 bps in response to concerns over the probe into its largest bank, Espirito Santo, by Luxembourg's justice department.
5. High Yield (YTM) Monitor – High Yield rates rose 2.0 bps last week, ending the week at 5.32% versus 5.30% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 2.0 points last week, ending at 1881.
7. TED Spread Monitor – The TED spread fell 0.6 basis points last week, ending the week at 21.2 bps this week versus last week’s print of 21.8 bps.
8. CRB Commodity Price Index – The CRB index rose 0.5%, ending the week at 311 versus 309 the prior week. As compared with the prior month, commodity prices have increased 1.1% 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 1 bps to 15 bps.
10. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 22 basis points last week, ending the week at 2.97% versus last week’s print of 2.76%. 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 0.4% last week, or 13 yuan/ton, to 3124 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 207 bps, -8 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 1.0% upside to TRADE resistance and 1.1% downside to TRADE support.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT