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Following the impressive correction two weeks ago, last week actually saw the XLF gain 0.7% bringing the YTD move to +2.4%. The outlook is fairly mixed at the moment. Based on our Financial Risk Monitor Summary below, there is a roughly even mix of positive and negative signals in the short-term but more red than green in the intermediate term duration.
Here are a few of the notable callouts on the week:
* High Yield (YTM) Monitor – High Yield rates fell 12.0 bps last week, ending the week at 5.95% versus 6.07% the prior week.
* 2-10 Spread – Last week the 2-10 spread tightened to 198 bps, -4 bps tighter than a week ago.
* CRB Commodity Price Index – The CRB index fell -1.2%, ending the week at 292 versus 296 the prior week. As compared with the prior month, commodity prices have decreased -2.4%
Financial Risk Monitor Summary
• Short-term(WoW): Negative / 3 of 12 improved / 3 out of 12 worsened / 6 of 12 unchanged
• Intermediate-term(WoW): Negative / 2 of 12 improved / 6 out of 12 worsened / 4 of 12 unchanged
• Long-term(WoW): Negative / 2 of 12 improved / 4 out of 12 worsened / 6 of 12 unchanged
1. U.S. Financial CDS - Overall it was a fairly uneventful week for US Financials as roughly half the complex widened modestly while the other half tightened. On balance, there was a net change of 0 bps.
Tightened the most WoW: RDN, AON, CB
Widened the most WoW: GNW, AIG, MET
Tightened the most WoW: AGO, MBI, RDN
Widened the most MoM: GNW, MET, PRU
2. European Financial CDS - Outside of Banco Espirito Santo, which tightened by 318 bps to 344 bps on the week, swaps were nominally wider across Europe last week (+2 bps). Russia's Sberbank continued to widen (+3 bps to 355 bps) though at a slower pace than in recent weeks.
3. Asian Financial CDS - Indian and Chinese bank swaps were slightly tighter on the week with Bank of China tightening the most (-7 bps to 128 bps). In Japan, the picture was mixed as Daiwa tightened by 5 bps but Nomura, Sumitomo and Mizuho all widened by 2 bps.
4. Sovereign CDS – Sovereign swaps widened across the board over last week. The usual suspects, Italy, Portugal and Spain, widened by 16, 17 and 9 bps, respectively. Meanwhile, German and US sovereign swaps widened by 1 bp. Japan was a notable mover on the week, widening by 7 bps (+19%) to 43 bps.
5. High Yield (YTM) Monitor – High Yield rates fell 12.0 bps last week, ending the week at 5.95% versus 6.07% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 3.0 points last week, ending at 1873.
7. TED Spread Monitor – The TED spread fell 0.3 basis points last week, ending the week at 21.2 bps this week versus last week’s print of 21.51 bps.
8. CRB Commodity Price Index – The CRB index fell -1.2%, ending the week at 292 versus 296 the prior week. As compared with the prior month, commodity prices have decreased -2.4% 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 was unchanged at 15 bps.
10. Chinese Interbank Rate (Shifon Index) – The Shifon Index fell 16 basis points last week, ending the week at 3.04% versus last week’s print of 3.196%. 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 0.3% last week, or 8 yuan/ton, to 3139 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, -4 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 0.2% upside to TRADE resistance and 2.6% downside to TRADE support.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT