Key Takeaway:
The roller coaster ride continues with high yield (-22 bps) and commodities (+6.2%) looking better on the week, while China, the TED Spread and EM sovereign swaps looked worse.
China, of course, remains a front burner focus, but the TED Spread has been quietly creeping higher over the past month and is now +6 bps M/M to 31 bps as well.
Concerns over the global fallout from a slowing China continue to reverberate. CDS for Chinese financial institutions widened between +16 and +21 bps last week, and the Chinese interbank rate widened by +26 bps to 2.03%.
Reflecting the market's growing worries about China, our heatmap below is dominated by red on both the short and intermediate term.
Current Ideas:
Financial Risk Monitor Summary
• Short-term(WoW): Negative / 1 of 12 improved / 5 out of 12 worsened / 6 of 12 unchanged
• Intermediate-term(WoW): Negative / 0 of 12 improved / 7 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
1. U.S. Financial CDS – Swaps tightened for 12 out of 27 domestic financial institutions while unchanged at the median. Even with stocks losing value last week, overall perceived risk of default in the U.S. was little changed.
Tightened the most WoW: MBI, AGO, ACE
Widened the most WoW: LNC, PRU, MET
Tightened the most WoW: ACE, ALL, CB
Widened the most MoM: MET, MMC, RDN
2. European Financial CDS – Swaps mostly widened in Europe last week, strongly affected by weak Chinese manufacturing data, even after ECB President Mario Draghi said he could provide further stimulus to the Eurozone given his projections for slower than expected growth and low inflation.
3. Asian Financial CDS – Chinese financial CDS widened notably last week, between +15 and +21 bps, as the country was hit with weak manufacturing data early in the week. Meanwhile, Japanese and Indian financial CDS were little changed.
4. Sovereign CDS – Sovereign Swaps were little changed last week. French sovereign swaps tightened by -1 bps to 33 bps while Italian sovereign swaps widened by +1 bps to 116.
5. Emerging Market Sovereign CDS – Emerging market swaps widened last week on concerns that their export-based economies would be hurt by slowing Chinese growth. Brazilian sovereign swaps widened the most, by +48 bps to 379, followed by Turkish swaps, which widened by +17 bps to 280.
6. High Yield (YTM) Monitor – High Yield rates fell 22 bps last week, ending the week at 7.15% versus 7.37% the prior week.
7. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 3.0 points last week, ending at 1865.
8. TED Spread Monitor – The TED spread rose 3 basis points last week, ending the week at 31 bps this week versus last week’s print of 27 bps.
9. CRB Commodity Price Index – The CRB index rose 6.2%, ending the week at 197 versus 185 the prior week. As compared with the prior month, commodity prices have decreased -0.8%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.
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.
11. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 26 basis points last week, ending the week at 2.03% versus last week’s print of 1.77%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.
12. Chinese Steel – Steel prices in China fell 0.6% last week, or 13 yuan/ton, to 2260 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.
13. 2-10 Spread – Last week the 2-10 spread tightened to 142 bps, -5 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.
14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 5.9% upside to TRADE resistance and 2.5% downside to TRADE support.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
