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Takeaway: The shortened holiday week was punctuated by big moves in AGO, MBIA and Espirito Santo.

Current Best Ideas:

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Key Callouts:

* U.S. Financial CDS -  Swaps at Assured (AGO) and MBIA (MBI) were sharply wider on the week, adding 87 and 137 bps, respectively. The moves come in response to Puerto Rican municpal debt exposure. Outside of those two entities, however, most of the rest of the complex was modestly tighter week over week. 

* European Financial CDS - After widening steadily, swaps were predominantly tighter in Europe this past week. Part of the relief came from Portugal where initial reports of a Luxembourg investigation into Espirito Santo turned out to be wrong. Meanwhile, a temporary short-selling ban in the stock and management change all led to a relief rally. Espirito Santo swaps were 24 bps tighter on the week, closing at 294 bps, but remain +124 bps on the month. 

Financial Risk Monitor Summary

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

 • Intermediate-term(WoW): Negative / 3 of 12 improved / 6 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

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1. U.S. Financial CDS -  Swaps at Assured (AGO) and MBIA (MBI) were sharply wider on the week, adding 87 and 137 bps, respectively. The moves come in response to Puerto Rican municpal debt exposure. Outside of those two entities, however, most of the rest of the complex was modestly tighter week over week. 

Tightened the most WoW: C, MMC, MTG

Widened the most WoW: MBI, AGO, AIG

Tightened the most WoW: TRV, ACE, ALL

Widened the most MoM: MBI, AGO, WFC

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2. European Financial CDS - After widening steadily, swaps were predominantly tighter in Europe this past week. Part of the relief came from Portugal where initial reports of a Luxembourg investigation into Espirito Santo turned out to be wrong. Meanwhile, a temporary short-selling ban in the stock and management change all led to a relief rally. Espirito Santo swaps were 24 bps tighter on the week, closing at 294 bps, but remain +124 bps on the month. 

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3. Asian Financial CDS - Swaps in Asian Financials were mostly tighter on the week, falling by an average of 3 bps. Chinese banks tightened slightly more than peers in India and Japan.

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4. Sovereign CDS – Sovereign swaps were little changed on the week outside of Portugal. Portguese swaps tightened 22 bps to 132 bps on the news that its largest bank, Espirito Santo, was not under investigation by Luxembourg. 

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5. High Yield (YTM) Monitor – High Yield rates rose 1.1 bps last week, ending the week at 5.34% versus 5.32% the prior week.

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6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 4.0 points last week, ending at 1885.

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7. TED Spread Monitor – The TED spread rose 1.3 basis points last week, ending the week at 22.5 bps this week versus last week’s print of 21.16 bps.

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8. CRB Commodity Price Index – The CRB index fell -1.9%, ending the week at 307 versus 313 the prior week. As compared with the prior month, commodity prices have increased 0.8% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

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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 15 bps.

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10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 8 basis points last week, ending the week at 2.96% versus last week’s print of 2.89%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

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11. Chinese Steel – Steel prices in China were unchanged last week at 3,125 yuan/ton, but are down 90 yuan/ton in the past month (-2.8% m/m). We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

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12. 2-10 Spread – Last week the 2-10 spread widened to 213 bps, 6 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

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13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.4% upside to TRADE resistance and 3.9% downside to TRADE support.

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Joshua Steiner, CFA

Jonathan Casteleyn, CFA, CMT