Takeaway: What is the risk monitor and why do we use it?
We use our weekly risk monitor primarily as an intermediate/longer term risk management tool. We look for early sings of inflections in bigger picture indicators so that we don't find ourselves flat-footed at times of major inflections. We try and keep the sensitivity "setting" low enough to avoid numerous false positive signals, but high enough that we don't actually miss the important signals. Anyone who's been involved in markets and risk management knows what a tricky balancing act this can be.
Along these lines, the bottom line is that there's very little being signaled on the risk front right now. Systemic interbank risk measures are all benign. Commodity price inflation, which had been a rising issue through the first ~10 weeks of the year, is now showing signs of cooling off, at least based on the CRB index price. One of the few areas of ongoing pressure is the 2-10 yield spread, which compressed a further 5 bps last week to 227 bps. In our experience, the trend in place tends to remain the path until you see the risk environment inflect. As we're not seeing any real inflection in risk at the moment, we wouldn't be surprised to see the general upward trend continue for the short/intermediate term trend.
Financial Risk Monitor Summary
• Short-term(WoW): Positive / 3 of 13 improved / 2 out of 13 worsened / 8 of 13 unchanged
• Intermediate-term(WoW): Negative / 4 of 13 improved / 5 out of 13 worsened / 4 of 13 unchanged
• Long-term(WoW): Positive / 5 of 13 improved / 2 out of 13 worsened / 6 of 13 unchanged
1. U.S. Financial CDS - Swaps widened for 16 out of 27 domestic financial institutions. Overall, however, the moves were generally small with the exception of the bond guarantors, MBI (+31 bps w/w) and AGO (+30 bps w/w). The global US banks were mixed with Citi the worst performer at +3 bps and JPM and GS at -2 bps.
Tightened the most WoW: GNW, JPM, WFC
Widened the most WoW: AGO, MBI, TRV
Tightened the most WoW: MBI, GNW, UNM
Widened the most MoM: ACE, TRV, SLM
2. European Financial CDS - It was another week of broad-based tightening for EU financial swaps, consistent with the falling risk associated with the Russia/Ukraine situation. Sberbank of Russia also posted another large w/w improvement (-23 bps to 318 bps).
3. Asian Financial CDS - There was substantial w/w tightening across Asian Financials last week. Indian bank swaps were tighter by 16-34 bps, while Chinese banks tightened 8-9 bps.
4. Sovereign CDS – Sovereign swaps mostly tightened over last week. Portuguese sovereign swaps tightened by -8.0% (-17 bps to 191 ) while Italian sovereign swaps widened by 0.5% (1 bps to 135).
5. High Yield (YTM) Monitor – High Yield rates fell 0.7 bps last week, ending the week at 5.70% versus 5.71% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1.0 points last week, ending at 1,855.
7. TED Spread Monitor – The TED spread rose 1 basis point last week, ending the week at 19.5 bps this week versus last week’s print of 18.49 bps.
8. CRB Commodity Price Index – The CRB index rose 0.8%, ending the week at 305 versus 303 the prior week. As compared with the prior month, commodity prices have increased 1.2% 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 15 bps.
10. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 16 basis points last week, ending the week at 2.66% versus last week’s print of 2.50%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.
11. Markit MCDX Index Monitor – Last week spreads tightened -1 bps, ending the week at 66 bps versus 67 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1.
12. Chinese Steel – Steel prices in China rose 0.3% last week, or 10 yuan/ton, to 3,275 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.
13. 2-10 Spread – Last week the 2-10 spread tightened to 227 bps, -5 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.
14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.5% upside to TRADE resistance and 0.9% downside to TRADE support.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
Daily table revenues averaged HK$1,107 million this week up 28% from the comparable period last year. The strong finish should bring March GGR to grow 11-12% YoY, including slots. Overall, this growth rate was in line with our model projection and indicative of consistent demand from the recent trends of December and January/February. For April, we are expecting mid-teens GGR growth for the Macau market.
In terms of market share, WYNN and Galaxy were the market share winners this month while MPEL and MGM were the clear losers. Q1 earnings for the US listed operators look fairly in line with current projections so investor enthusiasm may not match that experienced during the Q4 earnings season. Going forward this year, we believe LVS has the best shot at growing market share while Wynn Macau, MPEL, and MGM could be slight losers.
In this morning’s macro call with subscribers, Hedgeye CEO Keith McCullough discusses global markets and warns, “We’re watching a market do everything that you don’t want it to be doing. And consensus is not worried about it.”
Takeaway: In the most recent week, domestic equity mutual funds had drawdowns with fixed income taking the baton as the more stable asset class.
Editor's Note: This is a research note originally published March 27, 2014 by Hedgeye’s Financials Jonathan Casteleyn & Joshua Steiner. For more information on how you can subscribe to Hedgeye, please click here.
Investment Company Institute Mutual Fund Data and ETF Money Flow
In the most recent week, while fixed income inflow wasn't historically impressive considering the significant inflows in the beginning of last year, bonds have clearly been the more stable asset class year-to-date considering declining equity trends especially within domestic equity funds recently:
Total equity mutual funds produced the first week of net outflow in 6 weeks with $968 million of net redemptions, a deceleration from the $3.1 billion inflow the week prior. The $968 million outflow was caused by domestic fund losses during the most recent 5 day period ending March 19th, with $3.8 billion flowing out of U.S. equity funds versus $2.8 billion that flowed into international stock funds. The 2014 running weekly average inflow for equity mutual funds is now $4.3 billion, an improvement from the $3.0 billion weekly average inflow for 2013.
Fixed income mutual funds continued improving fund flow trends for the week ending March 19th with $2.4 billion flowing into all fixed income funds. The breakout of improving bond fund inflow amounted to $2.2 billion into taxable products and a $237 million inflow into tax-free or municipal products. The inflow into taxable products this week was 6th consecutive week of positive flow and the inflow into municipal or tax-free products was the 10th consecutive week of positive subscriptions. The 2014 weekly average for fixed income mutual funds now stands at a $1.5 billion weekly inflow, an improvement from 2013's weekly average outflow of $1.5 billion but a far cry from the $5.8 billion weekly average inflow from 2012 (our view of the blow off top in bond fund inflow).
ETFs experienced positive trends during the week, with a very strong week of subscriptions into stock ETFs with $10.1 billion in net inflow with bond ETFs experiencing a slightly above average inflow of $1.3 billion for the 5 day period. The 2014 weekly averages are now a $620 million weekly inflow for equity ETFs and a $926 million weekly inflow for fixed income ETFs.
The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $5.4 billion spread for the week ($9.2 billion of total equity inflow versus the $3.8 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $7.2 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.4 billion (negative numbers imply more positive money flow to bonds for the week).
Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.
Most Recent 12 Week Flow in Millions by Mutual Fund Product
Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds
The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $5.4 billion spread for the week ($9.2 billion of total equity inflow versus the $3.8 billion outflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $7.2 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.4 billion (negative numbers imply more positive money flow to bonds for the week).
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