Current Best Ideas:
Last week we flagged a broader trend of rising risk across the Financials complex. There were 3 things that caught our eye. The first was high yield rates rising 36 bps w/w. The second was EU financial CDS widening sharply, especially in Russia. The third was the increase in domestic financial CDS, where 27 of 27 reference entities we track were higher w/w. This week, high yield has calmed down (-28 bps w/w), but remains higher on the month by 34 bps. EU financial CDS was unchanged on the week, but remains higher on the month. US financial CDS was actually better on the week (-3 bps), but remains +6 bps on the month.
Financial Risk Monitor Summary
• Short-term(WoW): Positive / 5 of 12 improved / 1 out of 12 worsened / 6 of 12 unchanged
• Intermediate-term(WoW): Negative / 3 of 12 improved / 6 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
1. U.S. Financial CDS - Swaps tightened for 25 out of 27 domestic financial institutions. The US global banks were tighter by an average of 3 bps with JPM leading the way at -5 bps. In the consumer finance space, MTG & RDN were lower by 19 and 26 bps, respectively.
Tightened the most WoW: ALL, RDN, AXP
Widened the most/ tightened the least WoW: CB, TRV, AON
Widened the least/ tightened the most WoW: MMC, LNC, HIG
Widened the most MoM: AGO, SLM, COF
2. European Financial CDS - Swaps were mixed in Europe last week, but little changed overall. We've been keeping a close eye on Sberbank as our proxy for overall geopolitical risk. After rising steadily for several weeks, it cooled off notably this past week dropping 65 bps w/w to 315 bps.
3. Asian Financial CDS - Indian bank swaps tightened notably, while Japan and China were little changed.
4. Sovereign CDS – Sovereign swaps were little changed on the week with most countries moving 0-1 bps. Portugal and Japan were the outliers at +3 bps each.
5. High Yield (YTM) Monitor – High Yield rates fell 27.6 bps last week, ending the week at 5.95% versus 6.23% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 2.0 points last week, ending at 1866.
7. TED Spread Monitor – The TED spread rose 0.3 basis points last week, ending the week at 22.3 bps this week versus last week’s print of 22.0 bps.
8. CRB Commodity Price Index – The CRB index fell -1.4%, ending the week at 276 versus 280 the prior week. As compared with the prior month, commodity prices have decreased -4.3% 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 2 bps to 11 bps.
10. Chinese Interbank Rate (Shifon Index) – The Shifon Index fell 15 basis points last week, ending the week at 2.53% versus last week’s print of 2.68%. 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 2917 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 188 bps, -8 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 1.5% upside to TRADE resistance and 0.4% downside to TRADE support.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT