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Takeaway: The PBOC's pledge to allow its currency to depreciate sparked global concerns over the country's economic growth.

Key Takeaway:

Global markets were jolted last week as China's move to allow its currency to depreciate brought concerns over its growth to the forefront. The country's interbank rate in particular flashed red, rising 14 bps week over week. Additionally, CDS widened globally, especially in emerging markets, in response to the PBOC's move.

China's interbank rate, a gauge of systemic stress in the Chinese banking system, has been steadily rising for over a month. As we have pointed out, that stress and slowing Chinese growth are currently our biggest concern with regard to global financial risk.

Current Ideas:

MONDAY MORNING RISK MONITOR | PBOC'S DEVALUATION BRINGS CHINESE RISK TO THE FOREFRONT - RM19

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 0 of 12 improved / 4 out of 12 worsened / 8 of 12 unchanged

 • Intermediate-term(WoW): Negative / 4 of 12 improved / 8 out of 12 worsened / 0 of 12 unchanged

 • Long-term(WoW): Positive / 3 of 12 improved / 1 out of 12 worsened / 8 of 12 unchanged

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1. U.S. Financial CDS -  Swaps widened for 18 out of 27 domestic financial institutions. China allowing its currency to depreciate last week sparked global concerns over slow Chinese growth and left U.S. financial CDS wider by 2 bps at the median.

Tightened the most WoW: HIG, ALL, AXP

Widened the most WoW: RDN, CB, MET

Tightened the most WoW: ACE, AXP, CB

Widened the most MoM: GNW, MET, RDN

MONDAY MORNING RISK MONITOR | PBOC'S DEVALUATION BRINGS CHINESE RISK TO THE FOREFRONT - RM1

2. European Financial CDS - Swaps were mixed in Europe last week. 17 CDS' tightened while 20 widened. Greek bank CDS tightened between 321 and 3083 bps as European finance ministers approved an €86 billion bailout for the country on Friday.

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3. Asian Financial CDS - Swaps in Asia widened across the board as China's move to allow its currency to depreciate caused global concerns over the country's growth. CDS for the IDB Bank of India and the Bank of China widened the most, by 12 bps to 220 and by 10 bps to 121, respectively.

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4. Sovereign CDS – Most sovereign swaps were flat last week. Spanish sovereign swaps, which widened by 3 bps to 98, were the biggest mover for the week.

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5. Emerging Market Sovereign CDS – Emerging market swaps mostly widened last week. Thai sovereign swaps widened the most, by 22 bps to 134. Meanwhile, Brazilian swaps tightened by -21 bps to 305.

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6. High Yield (YTM) Monitor – High Yield rates rose 14 bps last week, ending the week at 7.21% versus 7.06% the prior week.

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7. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 6.0 points last week, ending at 1870.

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8. TED Spread Monitor – The TED spread fell 1 basis point last week, ending the week at 24 bps this week versus last week’s print of 25 bps.

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9. CRB Commodity Price Index – The CRB index fell -0.9%, ending the week at 198 versus 200 the prior week. As compared with the prior month, commodity prices have decreased -7.7%. 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 10 bps.

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11. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 14 basis points last week, ending the week at 1.67% versus last week’s print of 1.53%. 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 0.3% last week, or 6 yuan/ton, to 2355 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 widened to 148 bps, 3 bps wider 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 0.7% upside to TRADE resistance and 1.3% downside to TRADE support.

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Joshua Steiner, CFA

Jonathan Casteleyn, CFA, CMT