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Takeaway: Green still dominates our screen (for now) as both the short and intermediate trends are sequentially improved across the risk complex.

Current Best Ideas:

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Key Callouts:

* XLF Macro Quantitative Setup – The short-term setup in Financials looks bearish as our Macro team’s quantitative setup in the XLF shows 0.9% upside to TRADE resistance and 1.9% downside to TRADE support.

 

* 2-10 Spread – Last week the 2-10 spread tightened to 201 bps, -4 bps tighter than a week ago, but remains wider by 7 bps vs the prior month. 

* CRB Commodity Price Index – The CRB index fell -1.5%, ending the week at 279 versus 284 the prior week. As compared with the prior month, commodity prices have decreased -3.3% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 2 of 12 improved / 0 out of 12 worsened / 10 of 12 unchanged

 • Intermediate-term(WoW): Positive / 6 of 12 improved / 2 out of 12 worsened / 4 of 12 unchanged

 • Long-term(WoW): Negative / 2 of 12 improved / 2 out of 12 worsened / 8 of 12 unchanged

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1. U.S. Financial CDS -  Swaps tightened for 24 out of 27 domestic financial institutions. The biggest moves among the large caps came from MS and C ,where swaps tightened by 4 and 3 bps, respectively. 

Tightened the most WoW: TRV, XL, HIG

Widened the most WoW: UNM, AON, COF

Tightened the most WoW: MMC, AXP, C

Widened the most MoM: AGO, RDN, MBI

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2. European Financial CDS - Swaps mostly tightened in Europe last week as 25 banks saw swaps tighten vs just 11 that widened. Conspicuous moves came from Banco Espirito Santo in Portugal (+55 bps w/w to 385 bps) and Sberbank of Russia (+9 bps w/w to 340 bps). 

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3. Asian Financial CDS - Asia was mixed on the week with China tightening, India widening and Japan mixed.

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4. Sovereign CDS – Sovereign swaps were largely unchanged last week. Italy and Spain tightened by 1 and 4 bps, respectively, while the US, France and Portugal widened by 1, 2 and 4 bps. 

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5. High Yield (YTM) Monitor – High Yield rates fell 1.6 bps last week, ending the week at 5.86% versus 5.88% the prior week.

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6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1.0 points last week, ending at 1877.

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7. TED Spread Monitor – The TED spread fell 0.2 basis points last week, ending the week at 22 bps this week versus last week’s print of 22.16 bps.

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8. CRB Commodity Price Index – The CRB index fell -1.5%, ending the week at 279 versus 284 the prior week. As compared with the prior month, commodity prices have decreased -3.3% 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 tightened by 1 bps to 13 bps.

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10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 1 basis point last week, ending the week at 2.841% versus last week’s print of 2.853%. 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 rose 0.8% last week, or 25 yuan/ton, to 2999 yuan/ton. 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 201 bps, -4 bps tighter 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 0.9% upside to TRADE resistance and 1.9% downside to TRADE support.

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Joshua Steiner, CFA

Jonathan Casteleyn, CFA, CMT