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Takeaway: Our Risk Monitor shows a roughly even mix of positives and negatives across all three durations in the Financial Sector currently.

Current Ideas:

MONDAY MORNING RISK MONITOR: MIDDLE OF THE PACK IN YTD PERFORMANCE FOR FINANCIALS - 19

Key Takeaway:

The XLF fell -0.9% last week, the first down week in a month as Financials have also rebounded sharply with the broader indices since their mid-October lows. The XLF is right in the middle of the pack from a year-to-date sector performance standpoint, up 9.7% in 2014, the 5th best performer of the 9 major sector SPDRs trailing the performance of Healthcare (+21.6%), Utilities (+18.5%), Technology (+16.3%), and Consumer Staples (+11.3%). Specifically in the sector from a risk standpoint, Genworth Financial CDS regained some ground, with swaps falling -14.4% week-over-week.  However, Genworth swaps are still up 105.3% month-over-month on news that a review of its claims reserves and goodwill would result in a combined charge of over 1 billion dollars pre-tax. Travelers was the biggest mover for the week with swaps rising 33.4% from 28 bps to 38 bps. The company's CEO announced a neuromuscular condition last week forcing insurance on that company's credit profile higher. High yield spreads continued to back up over the back 5 days, rising 7 bps to 5.99%. Commodities continued to slide, although at a slower pace with the CRB Index falling another -0.6% on the week.

Our heat map table below is increasingly more green with intermediate-term measures now mostly positive and short-term and long-term mostly a mixture of improvement and unchanged.

Financial Risk Monitor Summary

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

 • Intermediate-term(WoW): Positive / 7 of 12 improved / 3 out of 12 worsened / 2 of 12 unchanged

 • Long-term(WoW): Positive / 2 of 12 improved / 1 out of 12 worsened / 9 of 12 unchanged

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1. U.S. Financial CDS -  Swaps tightened for 17 out of 27 domestic financial institutions.

Tightened the most WoW: GNW, MMC, AXP

Widened the most WoW: TRV, AON, ALL

Tightened the most WoW: MMC, CB, MBI

Widened the most MoM: GNW, TRV, AON

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2. European Financial CDS - Swaps mostly tightened in Europe last week

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3. Asian Financial CDS

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4. Sovereign CDS – European Sovereign Swaps mostly widened over last week. German sovereign swaps widened by 1.3% (0 bps to 20 ) and Portuguese sovereign swaps widened by 25.2% (42 bps to 211).

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5. High Yield (YTM) Monitor – High Yield rates rose 6.7 bps last week, ending the week at 5.99% versus 5.92% the prior week.

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6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 2.0 points last week, ending at 1880.

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7. TED Spread Monitor – The TED spread rose 1.4 basis points last week, ending the week at 22.4 bps this week versus last week’s print of 20.96 bps.

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8. CRB Commodity Price Index – The CRB index fell -0.6%, ending the week at 267 versus 268 the prior week. As compared with the prior month, commodity prices have decreased -2.2% 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 10 bps.

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10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 10 basis points last week, ending the week at 2.473% versus last week’s print of 2.569%. 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 fell 0.3% last week, or 9 yuan/ton, to 3047 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 widened to 181 bps, 1 bps wider 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 1.1% upside to TRADE resistance and 1.9% downside to TRADE support.

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Joshua Steiner, CFA

Jonathan Casteleyn, CFA, CMT