MONDAY MORNING RISK MONITOR | VOLATILITY ABOUNDS

Takeaway: Dovish comments from the Fed and a favorable US GDP reading led short-term risk perception to cool, but intermediate term risk remains high.

Key Takeaway:

The VIX has "cooled off" to ~26 following an intraday surge above 50 last week - the highest reading since early 2009. Global markets bounced on Wednesday following comments from Federal Reserve President William Dudley that a September rate hike now seems less compelling and a favorable revision to US GDP (+3.7% vs +2.3%) restored a degree of confidence. Risk warnings in our heatmap below eased off for the week with slightly more green than red in the short term. However, looking at the intermediate term, risk perception remains one-sided in favor of the negative; eight out of twelve measures are red. From our standpoint, nothing has changed fundamentally. The key risk metrics we watch in China remain on the same negative trend. 

 

Current Ideas:

MONDAY MORNING RISK MONITOR | VOLATILITY ABOUNDS - RM19 

 

 

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 / 2 of 12 improved / 8 out of 12 worsened / 2 of 12 unchanged
• Long-term(WoW): Positive / 3 of 12 improved / 2 out of 12 worsened / 7 of 12 unchanged

MONDAY MORNING RISK MONITOR | VOLATILITY ABOUNDS - RM15

 

1. U.S. Financial CDS – Swaps tightened for 14 out of 27 domestic financial institutions on positive GDP data and dovish comments from Fed President William Dudley. U.S. GDP came in at 3.7% in the second quarter, and Mr. Dudley commented that the case for a September rate increase is now less compelling.

Tightened the most WoW: ALL, CB, ACE
Widened the most WoW: BAC, C, MS
Tightened the most WoW: CB, ACE, AXP
Widened the most MoM: GNW, MET, GS

 

MONDAY MORNING RISK MONITOR | VOLATILITY ABOUNDS - RM1

 

2. European Financial CDS – Swaps mostly tightened in Europe last week as a global market recovery began on Wednesday.

 

MONDAY MORNING RISK MONITOR | VOLATILITY ABOUNDS - RM2

 

3. Asian Financial CDS – Swaps were a mixed bag across Asian Financials last week. Chinese banks were mostly tighter, while Japanese banks widened. 

 

MONDAY MORNING RISK MONITOR | VOLATILITY ABOUNDS - RM17

 

4. Sovereign CDS – Sovereign Swaps were little changed over last week. Spanish swaps widened the most, by +3 bps to 101.

 

MONDAY MORNING RISK MONITOR | VOLATILITY ABOUNDS - RM18

 

MONDAY MORNING RISK MONITOR | VOLATILITY ABOUNDS - RM3

 

MONDAY MORNING RISK MONITOR | VOLATILITY ABOUNDS - RM4

 

5. Emerging Market Sovereign CDS – Emerging market swaps mostly tightened last week. Russian swaps saw the largest move, tightening by -45 bps to 375.

 

MONDAY MORNING RISK MONITOR | VOLATILITY ABOUNDS - RM16

 

MONDAY MORNING RISK MONITOR | VOLATILITY ABOUNDS - RM20

 

 

6. High Yield (YTM) Monitor – High Yield rates fell 3 bps last week, ending the week at 7.37% versus 7.40% the prior week.

 

 

MONDAY MORNING RISK MONITOR | VOLATILITY ABOUNDS - RM5

 

 

7. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 4.0 points last week, ending at 1862.

 

 

MONDAY MORNING RISK MONITOR | VOLATILITY ABOUNDS - RM6

 

 

8. TED Spread Monitor – The TED spread fell 4 basis points last week, ending the week at 27 bps this week versus last week’s print of 31 bps.

 

 

MONDAY MORNING RISK MONITOR | VOLATILITY ABOUNDS - RM7

 

 

9. CRB Commodity Price Index – The CRB index rose 1.7%, ending the week at 197 versus 194 the prior week. As compared with the prior month, commodity prices have decreased -2.7%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

 

MONDAY MORNING RISK MONITOR | VOLATILITY ABOUNDS - RM8

 

 

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.

 

 

MONDAY MORNING RISK MONITOR | VOLATILITY ABOUNDS - RM9

 

 

11. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 7 basis points last week, ending the week at 1.77% versus last week’s print of 1.85%. 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 | VOLATILITY ABOUNDS - RM10

 

 

12. Chinese Steel – Steel prices in China fell 2.5% last week, or 58 yuan/ton, to 2273 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 | VOLATILITY ABOUNDS - RM12

 

 

13. 2-10 Spread – Last week the 2-10 spread widened to 146 bps, 4 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

 

MONDAY MORNING RISK MONITOR | VOLATILITY ABOUNDS - RM13

 

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 4.0% upside to TRADE resistance and 7.4% downside to TRADE support.

 

 

MONDAY MORNING RISK MONITOR | VOLATILITY ABOUNDS - RM14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 

 

 

 



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