The environment once again looks more constructive for Financials on the long side as green is now dominating our intermediate-term heat map summary table below. The short-term and long-term profiles look more balanced. With earnings season winding down, the next high-level data update will come from the Fed Senior Loan Officer Survey which should be out sometime this week. Historically, the C&I component of that survey has been a good leading indicator for credit quality cycle turning points.
Financial Risk Monitor Summary
• Short-term(WoW): Negative / 2 of 12 improved / 2 out of 12 worsened / 8 of 12 unchanged
• Intermediate-term(WoW): Positive / 5 of 12 improved / 2 out of 12 worsened / 5 of 12 unchanged
• Long-term(WoW): Negative / 3 of 12 improved / 2 out of 12 worsened / 7 of 12 unchanged
1. U.S. Financial CDS - It was a clean sweep in the US as swaps tightened for 27 out of 27 domestic financial institutions. Among the large caps, Goldman was the most improved on the week at -4 bps. US Financial swaps are now tighter on both a w/w and m/m basis.
Tightened the most WoW: TRV, CB, XL
Tightened the least WoW: AON, AXP, MS
Tightened the most WoW: CB, ACE, ALL
Widened the most/ tightened the least MoM: MET, GNW, SLM
2. European Financial CDS - It was a fairly uneventful week for EU bank swaps as they were higher by 1 bp, on average. Greek banks, however, saw swaps rise by 38 bps on the week and are now higher by an average of 114 bps on the month.
3. Asian Financial CDS - Chinese bank swaps were tighter on the week while those of Japanese and Indian banks were little changed.
4. Sovereign CDS – Sovereign swaps mostly tightened over last week with Portugal the outlier at +19 bps to 209 bps (and now +41 bps m/m). The US also widened, though by a modest +2 bps to 19 bps.
5. High Yield (YTM) Monitor – High Yield rates fell 0.9 bps last week, ending the week at 5.82% versus 5.83% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 10.0 points last week, ending at 1876.
7. TED Spread Monitor – The TED spread fell 0.1 basis points last week, ending the week at 22.4 bps this week versus last week’s print of 22.5 bps.
8. CRB Commodity Price Index – The CRB index rose 0.6%, ending the week at 272 versus 270 the prior week. As compared with the prior month, commodity prices have decreased -1.9% 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 widened by 2 bps to 9 bps.
10. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 11 basis points last week, ending the week at 2.55% versus last week’s print of 2.44%. 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 3,035 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 184 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 0.6% upside to TRADE resistance and 2.6% downside to TRADE support.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT