Monday Morning Risk Monitor | Risk Measures Recede In The Latest Week

Takeaway: Europe shrinks from the risk spotlight while China remains a concern. Earnings have commandeered the short-term high frequency news flow.

Key Takeaway:

The confluence of the Greek bailout and generally better than expected earnings thus far (81% of Financials have beaten bottom line estimates through Friday) have caused risk measures to recede in the latest week. Our primary focus remains on China, where we watch for signs of further deterioration. 

Current Ideas:

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Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 4 of 12 improved / 1 out of 12 worsened / 7 of 12 unchanged

 • Intermediate-term(WoW): Positive / 5 of 12 improved / 2 out of 12 worsened / 5 of 12 unchanged

 • Long-term(WoW): Negative / 2 of 12 improved / 2 out of 12 worsened / 8 of 12 unchanged

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1. U.S. Financial CDS -  Swaps tightened for 20 out of 27 domestic financial institutions given positive earnings results and the Greek bailout deal. As of July 17, 81% of financials companies reported earnings above estimates for the second quarter.

Tightened the most WoW: PRU, AIG, MTG

Widened the most/ tightened the least WoW: MMC, SLM, SLM

Tightened the most WoW: CB, HIG, RDN

Widened the most MoM: MMC, MBI, AGO

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2. European Financial CDS - Swaps tightened sharply in Europe last week, largely driven by the development of the Greek bailout deal. Greek CDS tightened for the first time in weeks, although they remain wider on a month-over-month basis.

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3. Asian Financial CDS - CDS of Chinese and Japanese banks tightened last week while widening between 4 bps and 7 bps for Indian banks.

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4. Sovereign CDS – Sovereign Swaps mostly tightened over last week. Portuguese sovereign swaps tightened the most, by -34 bps to 161, followed by Italian swaps which tightened by -19 bps to 104.

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5. Emerging Market Sovereign CDS – Emerging market swaps were mixed last week. Brazilian sovereign swaps widened the most, by 8 bps to 264. Meanwhile, Russian swaps tightened the most, by -16 bps to 312.

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6. High Yield (YTM) Monitor – High Yield rates were unchanged last week at 6.68%.

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7. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 4.0 points last week, ending at 1894.

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8. TED Spread Monitor – The TED spread fell 1 basis point last week, ending the week at 27 bps this week versus last week’s print of 28 bps.

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9. CRB Commodity Price Index – The CRB index fell -0.3%, ending the week at 215 versus 215 the prior week. As compared with the prior month, commodity prices have decreased -3.4%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

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10. 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 11 bps.

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11. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 7 basis points last week, ending the week at 1.28% versus last week’s print of 1.21%. 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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12. Chinese Steel – Steel prices in China rose 0.1% last week, or 2 yuan/ton, to 2112 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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13. 2-10 Spread – Last week the 2-10 spread tightened to 168 bps, -8 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

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14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.3% upside to TRADE resistance and 2.4% downside to TRADE support.

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Joshua Steiner, CFA

Jonathan Casteleyn, CFA, CMT