MONDAY MORNING RISK MONITOR: GROWING HEADWINDS

Takeaway: Central banks stepped in last week to stanch the bleeding but fundamental headwinds are growing.

Current Ideas:

MONDAY MORNING RISK MONITOR: GROWING HEADWINDS - 19

 

Key Takeaway:

Last week saw another wild ride as the market entered the week with rising concerns about the fallout of falling oil and a potential Russian collapse, but exited the week on a higher note in response to the Fed and ECB talking about delaying rate hikes and potentially purchasing assets, respectively. The XLF closed +2% on the week while most of the CDS gauges, on average, ended little changed on the week. 

 

Looking ahead, headwinds prevail. Rising concerns around credit quality fallout in oil-sensitive areas are coupled to ongoing pressure in yield spreads. Translation: rising revenue pressure in conjunction with growing provision expense.

 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 4 of 12 improved / 3 out of 12 worsened / 5 of 12 unchanged

 • Intermediate-term(WoW): Negative / 3 of 12 improved / 5 out of 12 worsened / 4 of 12 unchanged

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

  

MONDAY MORNING RISK MONITOR: GROWING HEADWINDS - 15

 

1. U.S. Financial CDS -  Swaps tightened for 21 out of 27 domestic financial institutions as the stock market rose on news that the Federal Reserve would not raise interest rates in the near future. Of institutions whose CDS widened, Genworth Financial widened the most (+30 bps) on its announcement that it has not yet completed its annual review of long-term care insurance active life margins.

 

Tightened the most WoW: PRU, MTG, ACE

Widened the most WoW: GNW, MBI, AGO

Tightened the most WoW: MMC, ACE, CB

Widened the most MoM: GNW, AGO, GS

 

MONDAY MORNING RISK MONITOR: GROWING HEADWINDS - 1

 

2. European Financial CDS - Swaps mostly widened in Europe last week, but results were somewhat mixed.  15 institutions' CDS tightened while 21 widened. Russia's Sberbank CDS continued to widen, increasing by 16 bps.  Sberbank's risk profile is well into the red with CDS at 583 bps.  

 

MONDAY MORNING RISK MONITOR: GROWING HEADWINDS - 2

 

3. Asian Financial CDS mostly widened last week with Japan's Sumitomo Mitsui leading the group (+3 bps, +4.9%).  Chinese CDS showed the smallest moves, which contrasts danger signals shown elsewhere such as the interbank rate, which rose +48 bps, and the price of Chinese steel, which fell -1.6% during the week.

 

MONDAY MORNING RISK MONITOR: GROWING HEADWINDS - 17

 

4. Sovereign CDS – Sovereign swaps mostly tightened over last week, particularly across Europe. The catalyst for tightening was the Fed signaling it would not raise rates in the near future, and the ECB signaling it is ready to pursue asset purchases.

 

MONDAY MORNING RISK MONITOR: GROWING HEADWINDS - 18

 

MONDAY MORNING RISK MONITOR: GROWING HEADWINDS - 3

 

MONDAY MORNING RISK MONITOR: GROWING HEADWINDS - 4

 

5. High Yield (YTM) Monitor – High Yield rates fell 18.5 bps last week, ending the week at 6.63% versus 6.82% the prior week.

 

MONDAY MORNING RISK MONITOR: GROWING HEADWINDS - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 5.0 points last week, ending at 1848.

 

MONDAY MORNING RISK MONITOR: GROWING HEADWINDS - 6

 

7. TED Spread Monitor – The TED spread fell 0.8 basis points last week, ending the week at 21.7 bps this week versus last week’s print of 22.49 bps.

 

MONDAY MORNING RISK MONITOR: GROWING HEADWINDS - 7

 

8. CRB Commodity Price Index – The CRB index fell -2.7%, ending the week at 240 versus 247 the prior week. As compared with the prior month, commodity prices have decreased -10.4% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: GROWING HEADWINDS - 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 was unchanged at 8 bps.

 

MONDAY MORNING RISK MONITOR: GROWING HEADWINDS - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 48 basis points last week, ending the week at 3.13% versus last week’s print of 2.65%. 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: GROWING HEADWINDS - 10

 

11. Chinese Steel – Steel prices in China fell 1.6% last week, or 47 yuan/ton, to 2832 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: GROWING HEADWINDS - 12

 

12. 2-10 Spread – Last week the 2-10 spread tightened to 152 bps, -2 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: GROWING HEADWINDS - 13

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 2.0% upside to TRADE resistance and 1.1% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: GROWING HEADWINDS - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 

 


7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more

Got Process? Zero Hedge Sells Fear, Not Truth

Fear sells. Always has. Look no further than Zero Hedge.

read more