TUESDAY MORNING RISK MONITOR: EU QE TAKES THE SPOTLIGHT

Takeaway: Rising expectations for EU QE are squeezing risk premia across the EU banks complex. Meanwhile, the market continues to fade Russia/Ukraine.

Current Best Ideas:

 

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Key Callouts:

 

* European Financial CDS - Rising expectations for EU QE seem to be driving enthusiasm across the complex as all but a handful of EU bank swaps were tighter on the week. Meanwhile, Sberbank of Russia continues to tighten as well (-7 bps w/w). We've been using Sberbank's CDS as our market proxy for the geopolitical risk premium of the Russia/Ukraine situation.

 

* High Yield (YTM) Monitor – High Yield rates fell 2.0 bps last week, ending the week at 5.59% versus 5.61% the prior week. More notably, high yield rates are down 38 bps on a m/m basis.

 

* 2-10 Spread – Last week the 2-10 spread tightened to 185 bps, -6 bps tighter than a week ago and down 18 bps on a m/m basis.

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 1 of 12 improved / 3 out of 12 worsened / 8 of 12 unchanged

 • Intermediate-term(WoW): Positive / 6 of 12 improved / 3 out of 12 worsened / 3 of 12 unchanged

 • Long-term(WoW): Negative / 2 of 12 improved / 3 out of 12 worsened / 7 of 12 unchanged

 

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1. U.S. Financial CDS -  Swaps were little changed, for the most part, across the US Financials complex. Overall, swaps tightened for 19 out of 27 domestic financial institutions. 

 

Tightened the most WoW: LNC, AXP, PRU

Widened the most WoW: UNM, ACE, JPM

Tightened the most WoW: RDN, MTG, WFC

Widened the most/ tightened the least MoM: GNW, UNM, MS

 

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2. European Financial CDS - Rising expectations for EU QE seem to be driving enthusiasm across the complex as all but a handful of EU bank swaps were tighter on the week. Meanwhile, Sberbank of Russia continues to tighten as well (-7 bps w/w). We've been using Sberbank's CDS as our market proxy for the geopolitical risk premium of the Russia/Ukraine situation.

 

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3. Asian Financial CDS - Asian financial swaps were generally tighter on the week, compressing by an average of 3 bps with the largest move at Japan's Daiwa (-10 bps to 79 bps).

 

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4. Sovereign CDS – Sovereign swaps mostly tightened over last week. French sovereign swaps tightened by -10.8% (-5 bps to 40 ) and Irish sovereign swaps widened by 3.2% (2 bps to 54).

 

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5. High Yield (YTM) Monitor – High Yield rates fell 2.0 bps last week, ending the week at 5.59% versus 5.61% the prior week. More notably, high yield rates are down 38 bps on a m/m basis.

 

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6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 4.0 points last week, ending at 1882.

 

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7. TED Spread Monitor – The TED spread fell 0.7 basis points last week, ending the week at 21.1 bps this week versus last week’s print of 21.8 bps.

 

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8. CRB Commodity Price Index – The CRB index rose 1.6%, ending the week at 293 versus 288 the prior week. As compared with the prior month, commodity prices have decreased -0.6% 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 widened by 1 bps to 16 bps.

 

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10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 3 basis points last week, ending the week at 2.87% versus last week’s print of 2.84%. 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 fell 1.0% last week, or 32 yuan/ton, to 3060 yuan/ton. Prices are lower by 2.3% on a m/m basis. 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 tightened to 185 bps, -6 bps tighter than a week ago and down 18 bps on a m/m basis. 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 1.2% upside to TRADE resistance and 1.0% downside to TRADE support.

 

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Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT