MONDAY MORNING RISK MONITOR | RISK IS GROWING

Takeaway: High yield rates and the TED Spread are both signaling that risk is rising despite the Fed's decision to remain at bay.

Key Takeaway:

While equities were broadly weak on the Fed's decision to keep rates unchanged, CDS tightened around the globe. That said, counterparty risk, as measured by the TED spread, rose notably last week on the Fed's decision. The TED Spread increased by +5 bps to 36 bps. Additionally, High Yield rates increased by +21 bps to 7.30%. 


Current Ideas:


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Financial Risk Monitor Summary

• Short-term(WoW): Negative / 3 of 12 improved / 3 out of 12 worsened / 6 of 12 unchanged
• Intermediate-term(WoW): Negative / 4 of 12 improved / 5 out of 12 worsened / 3 of 12 unchanged
• Long-term(WoW): Negative / 1 of 12 improved / 2 out of 12 worsened / 9 of 12 unchanged

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1. U.S. Financial CDS – While the stock market fell following the Fed's meeting, the perceived risk of default for domestic financial institutions declined last week. Swaps tightened for 18 out of 27 domestic financial institutions.

Tightened the most WoW: HIG, WFC, CB
Widened the most WoW: MMC, LNC, GNW
Tightened the most WoW: CB, AGO, ALL
Widened the most MoM: SLM, MMC, LNC

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2. European Financial CDS – Similar to the U.S., European equities fell last week. However, CDS mostly tightened with an average change of -8 bps.

 

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3. Asian Financial CDS – Bank swaps tightened broadly in the Asian region, especially in China and India. Chinese banks' CDS all tightened by -11 bps, Indian banks' CDS between -6 and -7 bps.

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4. Sovereign CDS – Sovereign swaps mostly tightened over last week. Portuguese sovereign swaps tightened the most, by -11 bps to 160.

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5. Emerging Market Sovereign CDS – Emerging market swaps tightened last week. During the week, Indonesian swaps tightened the most, by -32 bps to 213. Also, Russian swaps tightened by -18 bps last week. That brings Russian CDS' month-over-month change to -68 bps, likely due in part to oil prices sustaining a slight rise over that period.

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6. High Yield (YTM) Monitor – High Yield rates rose 21 bps last week, ending the week at 7.30% versus 7.09% the prior week.

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7. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 3.0 points last week, ending at 1867.

 

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8. TED Spread Monitor – The TED spread rose 5 basis points last week, ending the week at 36 bps this week versus last week’s print of 31 bps.

 

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9. CRB Commodity Price Index – The CRB index fell -0.8%, ending the week at 194 versus 196 the prior week. As compared with the prior month, commodity prices have increased 1.5%. 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 widened by 1 bps to 10 bps.

 

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11. Chinese Interbank Rate (Shifon Index) –  The Shifon Index was unchanged last week at 1.90%. 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 fell 0.8% last week, or 18 yuan/ton, to 2207 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 145 bps, -3 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 4.1% upside to TRADE resistance and 2.6% downside to TRADE support.

 

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Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT