Current Best Ideas:
Areas of intermediate-term stress remain rising Sovereign CDS (+9 bps m/m to +82 bps), rising junk bond yields (+34 bps m/m to 5.66%), compressing US yield spreads (2-10 spread -9 bps m/m to 198 bps), and rising Chinese interbank rates (+34 bps m/m to 3.31%).
Bigger picture, our view remains that ongoing 2H14 macro headwinds from falling rates and decelerating home prices will continue to put pressure on the Financials complex.
Financial Risk Monitor Summary
• Short-term(WoW): Positive / 3 of 12 improved / 1 out of 12 worsened / 8 of 12 unchanged
• Intermediate-term(WoW): Negative / 2 of 12 improved / 5 out of 12 worsened / 5 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 - The large cap US banks and consumer finance companies were slightly wider on the week, rising by an average of 3 bps. The insurance complex, however, was tighter on the week where spreads compressed by an average of 2 bps.
Tightened the most WoW: MMC, ACE, AON
Widened the most WoW: GS, COF, CB
Widened the least/ tightened the most WoW: UNM, XL, AON
Widened the most MoM: MBI, MTG, AGO
2. European Financial CDS - Russian bank, Sberbank, continued to see its swaps widen (+18 bps to 283 bps). Outside of Russia, however, there was slight tightening across Europe. The average EU bank tightened 2 bps on the week.
3. Asian Financial CDS - Swaps tightened at Indian banks by an average of 11 bps, while the rest of Asia was largely unchanged.
4. Sovereign CDS – Sovereign swaps tightened an average of 3 bps over the week. Portuguese swaps tightened the most, -11 bps, with Spain next at -3 bps. Swaps in the US were unchanged at 16 bps.
5. High Yield (YTM) Monitor – High Yield rates fell 4 bps last week, ending the week at 5.66% versus 5.70% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1.0 points last week, ending at 1884.
7. TED Spread Monitor – The TED spread fell 1.3 basis points last week, ending the week at 20.6 bps this week versus last week’s print of 21.9 bps.
8. CRB Commodity Price Index – The CRB index rose 0.5%, ending the week at 298 versus 297 the prior week. As compared with the prior month, commodity prices have decreased -4.4% 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 widened by 1 bps to 14 bps.
10. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 7 basis points last week, ending the week at 3.31% versus last week’s print of 3.24%. 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 0.6% last week, or 18 yuan/ton, to 3126 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 198 bps, -3 bps tighter than a week ago and is down 9 bps month-over-month. 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 0.5% downside to TRADE support.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT