Current Best Ideas:
Portugal's Espirito Santo Group continues to dominate news flow on the banking front. Both EU and US global bank swaps are widening sharply, and TED Spread is beginning to widen as well. For now, there appears to be no reason to assume that Espirito Santo's problems are widespread, but there is a rising level of uneasiness as investors ask how could this bank, which was under so much scrutiny for the last few years, suddenly be now having such problems? Perhaps more concerning is the fundamental macro slowdown that's taking place in much of the data across Europe.
The US banks are also seeing spreads widen. Citi and Morgan Stanley are wider on the week by 10 bps. We'll be keeping a close eye on Espirito Santo to see whether the situation is inflecting for better or worse.
Financial Risk Monitor Summary
• Short-term(WoW): Negative / 2 of 12 improved / 7 out of 12 worsened / 3 of 12 unchanged
• Intermediate-term(WoW): Negative / 2 of 12 improved / 9 out of 12 worsened / 1 of 12 unchanged
• Long-term(WoW): Negative / 2 of 12 improved / 6 out of 12 worsened / 4 of 12 unchanged
1. U.S. Financial CDS - Large cap US banks widened an average of 7 bps last week, as fears around Portugal's crisis rippled across the Atlantic. Citi and Morgan Stanley were 10 bps wider each.
Widened the least/ tightened the most WoW: AGO, TRV, TRV
Widened the most WoW: C, MS, MTG
Widened the least/ tightened the most WoW: ALL, TRV, AON
Widened the most MoM: MBI, AGO, WFC
2. European Financial CDS - Swaps were wider across Europe's banking complex by an average of 12 bps, led by Portgugal's Espirito Santo which widened by 100 bps to 394 bps. Italian and Spanish banks also widened considerably.
3. Asian Financial CDS - Bank swaps were slightly wider in China and India and mixed to tighter in Japan.
4. Sovereign CDS – Sovereign swaps widened sharply around the world, except for in the U.S. Leading the charge is Portugal, where CDS widened 65 bps w/w to 198 bps. Caught in Portugal's undertow were Italy and Spain, where swaps widened 10 and 12 bps, respectively. France and Germany were modestly wider at +3 and +2 bps as well. The U.S. tightened by 3 bps to 16 bps and is now 6 bps inside of Germany.
5. High Yield (YTM) Monitor – High Yield rates rose 9.6 bps last week, ending the week at 5.43% versus 5.34% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1.0 point last week, ending at 1884.
7. TED Spread Monitor – The TED spread fell 0.9 basis points last week, ending the week at 21.6 bps this week versus last week’s print of 22.51 bps.
8. CRB Commodity Price Index – The CRB index fell -3.3%, ending the week at 297 versus 307 the prior week. As compared with the prior month, commodity prices have decreased -3.7% 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 1 bps to 14 bps.
10. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 36 basis points last week, ending the week at 3.3% versus last week’s print of 2.94%. 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 rose 0.2% last week, or 7 yuan/ton, to 3,132 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, -6 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 0.6% upside to TRADE resistance and 0.7% downside to TRADE support.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT