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European Banking Monitor: Financials Swaps Pull-Back

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email 

 

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European Financial CDS - 31 of 37 reference entities in Europe tightened on the week by an average of 5 bps. While the month-over-month change is still +11 bps, on average, it has moderated notably with this last print.

 

European Banking Monitor: Financials Swaps Pull-Back - chart1 Financials CDS

 

Sovereign CDS – Sovereign swaps were mixed last week with Italian swaps widening the most (+13 bps to 133 bps) and Portuguese swaps tightening the most (-6 bps to 190 bps). 

 

European Banking Monitor: Financials Swaps Pull-Back - chart2 sovereign CDS

 

European Banking Monitor: Financials Swaps Pull-Back - chart3 sovereign CDS

 

European Banking Monitor: Financials Swaps Pull-Back - chart4 sovereign CDS

 

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 7 bps.

 

European Banking Monitor: Financials Swaps Pull-Back - chart5 Euribor OIS Spread

 

Matthew Hedrick 

Associate

 

Ben Ryan 

Analyst

 

 

 


MONDAY MORNING RISK MONITOR: BALANCED

Takeaway: Our Risk Monitor is showing a roughly even mix of positives and negatives in the intermediate and longer-term trends.

Current Ideas:

 

MONDAY MORNING RISK MONITOR: BALANCED - 19 2 

 

Key Takeaway:

Our overriding message the last month has been one of caution. We overstayed our welcome on the short side by one week as the XLF had a nice (+3.5%) bounce last week, though that was following a 6.3% decline in the month leading up. The message from the summary table below is currently showing more green than red in the short-term and an even mix between red and green over the intermediate and longer-term durations. Based on this, we're taking the threat level down a notch this morning and characterizing the outlook as balanced based on our various risk monitor factors.

 

Financial Risk Monitor Summary

 

  • Short-term(WoW): Positive / 5 of 12 improved / 1 out of 12 worsened / 6 of 12 unchanged  
  • Intermediate-term(WoW): Positive / 5 of 12 improved / 4 out of 12 worsened / 3 of 12 unchanged  
  • Long-term(WoW): Negative / 3 of 12 improved / 3 out of 12 worsened / 6 of 12 unchanged

MONDAY MORNING RISK MONITOR: BALANCED - 15 2

 

1. U.S. Financial CDS -  Swaps tightened for 24 out of 27 domestic financial institutions for an average decline of 6 bps. In fact, US financials are now tighter by 10 bps on the month. The biggest improvements came from BofA and MS (both were -6 bps w/w). 

 

Tightened the most WoW: AXP, MTG, MBI

Widened the most WoW: TRV, MET, UNM

Tightened the most WoW: ACE, ALL, CB

Widened the most MoM: TRV, MET, SLM

 

MONDAY MORNING RISK MONITOR: BALANCED - 1

 

2. European Financial CDS - 31 of 37 reference entities in Europe tightened on the week by an average of 5 bps. While the month-over-month change is still +11 bps, on average, it has moderated notably with this last print.

 

MONDAY MORNING RISK MONITOR: BALANCED - 2 2

 

3. Asian Financial CDS - Indian bank swaps tightened by an average of 10 bps on the week and are now tighter by 17 bps on the month. Japanese financials were little changed on the week. 

 

MONDAY MORNING RISK MONITOR: BALANCED - 17

 

4. Sovereign CDS – Sovereign swaps were mixed last week with Italian swaps widening the most (+13 bps to 133 bps) and Portuguese swaps tightening the most (-6 bps to 190 bps). 

 

MONDAY MORNING RISK MONITOR: BALANCED - 18

 

MONDAY MORNING RISK MONITOR: BALANCED - 3

 

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5. High Yield (YTM) Monitor – High Yield rates fell 19.7 bps last week, ending the week at 5.83% versus 6.02% the prior week.

 

MONDAY MORNING RISK MONITOR: BALANCED - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 12.0 points last week, ending at 1866.

 

MONDAY MORNING RISK MONITOR: BALANCED - 6

 

7. TED Spread Monitor – The TED spread rose 1.8 basis points last week, ending the week at 22.6 bps this week versus last week’s print of 20.8 bps.

 

MONDAY MORNING RISK MONITOR: BALANCED - 7

 

8. CRB Commodity Price Index – The CRB index fell -0.4%, ending the week at 270 versus 271 the prior week. As compared with the prior month, commodity prices have decreased -3.2% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: BALANCED - 8

 

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 7 bps.

 

MONDAY MORNING RISK MONITOR: BALANCED - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 4 basis points last week, ending the week at 2.42% versus last week’s print of 2.46%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

MONDAY MORNING RISK MONITOR: BALANCED - 10

 

11. Chinese Steel – Steel prices in China rose 0.3% last week, or 10 yuan/ton, to 3,028 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: BALANCED - 12

 

12. 2-10 Spread – Last week the 2-10 spread widened to 188 bps, 6 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: BALANCED - 13

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.6% upside to TRADE resistance and 1.2% downside to TREND support.

 

MONDAY MORNING RISK MONITOR: BALANCED - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 

 



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Germany Confirms #GrowthSlowing

Takeaway: Germany’s IFO Business Confidence survey declined again in October.

German IFO Business Confidence declined for a sixth straight month in the October reading to a level not seen since December 2012. 

 

This reading is not only in line with declining trends across the German economy over recent months but also remains an anchor to our Q4 Macro theme #EuropeSlowing.  

 

Germany Confirms #GrowthSlowing - chart2


Commodities Weekly Sentiment Tracker

Note: Using the z-score in the tables below as a coefficient of variation for standard error helps us flag the relative market positioning of the commodities in the CRB Index. It is not intended as a predictive signal for the reversion to trailing twelve month historical averages. For week-end price data, please refer to “Commodities: Weekly Quant” published at the end of the previous week. Feel free to ping us for additional color.    

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1.       CFTC Net Futures and Options Positioning CRB Index: The Commodities Futures Trading Commission (CFTC) releases “Commitments of Traders Reports” at 3:30 p.m. Eastern Time on Friday. The release usually includes data from the previous Tuesday (Net Positions as of Tuesday Close), and includes the net positions of “non-commercial” futures and options participants. A “Non-Commercial” market participant is defined as a “speculator.” We observe the weekly marginal changes in the overall positioning of “non-commercial” futures and options positions to assess the directionally-biased capitulation risk among those with large, speculative positions.

 

The SOYBEANS, COTTON, AND GOLD markets experienced the most BULLISH relative positioning change in the CRB week-over-week

The ORANGE JUICE, SILVER, AND COPPER markets experienced the most BEARISH relative positioning change in the CRB week-over-week

  • Note that we are currently bearish on both copper and oil. On oil, we outlined our bearish case on in a few recent notes. Please see the links below for color:

OPEC's Next Move

  • To summarize, we consider formal production cuts out of OPEC’s November 27th meeting highly unlikely and think this expectation will disappoint as a bull catalyst.

Oil Has Further Downside Before the Bottom

  • The expectation for a supply/demand floor is not a near-term catalyst to backstop volatility-induced, real-time market moves.

We’ll be hosting a call tomorrow with an analysis of production costs for North American shale plays. In short, we believe consensus underestimates the rapid technological advancement in oil and gas extraction from shale resources. See the link below or email for access to the call:

 

REAL COST OF PRODUCING TIGHT OIL AND SHALE GAS: FACT VS. FICTION W/ SPECIALIST LEONARDO MAUGERI  

 

Commodities Weekly Sentiment Tracker - chart1 CFTC Sentiment

 

2.       Spot – Second Month Basis Differential: Measures the market expectation for forward looking prices in the near-term.

  • The CORN, WHEAT, AND COFFEE markets are positioned for HIGHER PRICES near-term
  • The COTTON, RBOB GASOLINE, AND LEAN HOGS markets are positioned for LOWER PRICES near-term

Commodities Weekly Sentiment Tracker - chart2 spot 2nd month basis

 

3.       Spot – 1 Year Basis Differential: Measures the market expectation for forward-looking prices between spot and the respective contract expiring 1-year later.

  • The CORN, SUGAR, AND WHEAT markets are positioned for HIGHER PRICES in 1-year  
  • The LEAN HOGS, LIVE CATTLE, AND COCOA markets are positioned for LOWER PRICES in 1-year  

Commodities Weekly Sentiment Tracker - chart3 spot 1Yr basis

 

4.       Open Interest: Aggregate open interest measures the amount of opened positions in all actively traded futures contract months. Open interest can be thought of as “naked” or “directionally-biased” contracts as opposed to hedgers scalping and providing liquidity. Most of the open interest is created from large speculators or participants who are either: 1) Producers/sellers of the physical commodity hedging their cash market exposure or 2) Large speculators who are directionally-biased on price.

 

Commodities Weekly Sentiment Tracker - chart4 open interest         

 

Ben Ryan

Analyst

            

 

 


Monday Mashup: BWLD, BJRI and More

Monday Mashup: BWLD, BJRI and More - 11

 

Recent Notes

10/20/14 Monday Mashup: DRI, EAT and More

10/21/14 CMG: Dip Presents Buying Opportunity

10/21/14 EAT: Earnings Recap

10/23/14 MCD: Millennials Aren't the Problem

10/24/14 Invite | Ebola Forecasting & Containment Call with Dr. Jeffrey Shaman

 

Events This Week

Monday, October 27th

  • DENN earnings call 4:30pm EST
  • BWLD earnings call 5:00pm EST

Tuesday, October 28th

  • DIN earnings call 11:00am EST
  • KONA earnings call 5:00pm EST

Wednesday, October 29th

  • PNRA earnings call 8:30am EST
  • IRG earnings call 5:00pm EST

Thursday, October 30th

  • SBUX earnings call 5:00pm EST

 

Chart of the Day

Cheese block prices are up 14.4% YTD and 23.8% YoY.

 

Monday Mashup: BWLD, BJRI and More - 2

 

Recent News Flow

Thursday, October 23rd

  • BJRI Wayne L. Jones, Executive VP and Chief Restaurant Operations Officer, announced he will be resigning his position with the company effective November 7, 2014 in order to pursue a new, undisclosed, opportunity in the restaurant industry.

Friday, October 24th

  • BWLD was upgraded to buy from hold at Feltl and Company.

 

Sector Performance

The XLY (+3.8%) underperformed the SPX (+4.1%), as both casual dining and quick service stocks, on average, underperformed the XLY.

Monday Mashup: BWLD, BJRI and More - 3

Monday Mashup: BWLD, BJRI and More - 4

 

XLY Quantitative Setup

From a quantitative setup, the sector remains bearish on an intermediate-term TREND duration.

Monday Mashup: BWLD, BJRI and More - 5

 

Casual Dining Restaurants

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Quick Service Restaurants

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Howard Penney

Managing Director

 

Fred Masotta

Analyst


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