MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE

Takeaway: Last week some positives, but mostly negatives with the intermediate term framework remaining decidedly negative.

Key Takeaway:

Risk parameters remain decidedly negative over the intermediate term, but appear to have struck a balance between positive and negative in the shorter term and longer term.

Notable events last week included the US Jobs report, which saw only 173k jobs added in August, less than the 220k expected and China's downward revision to GDP for 2014 to 7.3% from 7.4%. On the flip side, expectations for Chinese stimulus created some optimism and junk bonds saw a small bounce . Additionally, the FOMC meeting announcement coming this week added further uncertainty to the mix.

We continue to highlight China as our biggest concern with Chinese steel prices continuing to fall.


Current Ideas:


MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM19

Financial Risk Monitor Summary

• Short-term(WoW): Positive / 3 of 12 improved / 1 out of 12 worsened / 8 of 12 unchanged
• Intermediate-term(WoW): Negative / 2 of 12 improved / 5 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

MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM15

1. U.S. Financial CDS – Swaps tightened for 16 out of 27 domestic financial institutions with an average move of -1 bps tighter.

Tightened the most WoW: AXP, MS, MTG
Widened the most WoW: SLM, MET, ACE
Tightened the most WoW: CB, ACE, ALL
Widened the most MoM: SLM, WFC, MET

MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM1

2. European Financial CDS – Swaps tightened for the most part in Europe last week. The median move was a -3 bps, while Greek bank CDS were outliers, tightening between -341 bps and -3087 bps.

MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM2

3. Asian Financial CDS – Swaps for Chinese banks widened between +1 bps and +4 bps last week as the country revised its 2014 growth rate down from 7.4% to 7.3%. 

MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM17

4. Sovereign CDS – Sovereign Swaps were flat to tighter last week. Italian sovereign swaps tightened the most, by -4 bps to 112.

MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM18

MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM3

MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM4


5. Emerging Market Sovereign CDS – Emerging market swaps were mixed last week. Brazilian sovereign swaps widened by 16 bps to 395. Meanwhile, Russian swaps tightened by -15 bps to 370.

MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM16

MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM20

6. High Yield (YTM) Monitor – High Yield rates fell 7 bps last week, ending the week at 7.09% versus 7.15% the prior week.

MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM5

7. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 5.0 points last week, ending at 1870.

MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM6

8. TED Spread Monitor – The TED spread was unchanged last week at 31 bps.

MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM7

9. CRB Commodity Price Index – The CRB index was unchanged last week at 197. As compared with the prior month, commodity prices have decreased -0.6%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.


MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - 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 | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM9


11. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 13 basis points last week, ending the week at 1.90% versus last week’s print of 2.03%. 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 | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM10


12. Chinese Steel – Steel prices in China fell 1.5% last week, or 35 yuan/ton, to 2225 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 | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM12


13. 2-10 Spread – Last week the 2-10 spread widened to 148 bps, 7 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.


MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM13


14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 2.7% upside to TRADE resistance and 4.5% downside to TRADE support.


MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM14


Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT