MONDAY MORNING RISK MONITOR | EASY MONEY VS SLOWING GROWTH

Takeaway: Investors continue to weigh easy monetary policy against concerns about slowing growth.

 MONDAY MORNING RISK MONITOR | EASY MONEY VS SLOWING GROWTH - RM11 2

 

Key Takeaway:

Easy central bank policy continued to help offset economic growth concerns last week. While U.S. third-quarter GDP came in at a low 1.5%, it only added to investor optimism about the Federal Reserve keeping rates near zero. Investor reaction was such that the TED spread fell an impressive -7 bps to 25. Additionally, Chinese bank CDS continued to tighten while the Chinese interbank rate dropped another -11 bps following the PBOC announcing it would cut rates and reserve requirements. This was in spite of the slowest GDP growth since the financial crisis. Our warning of caution: growth is slowing.

 

Given investors' positive reaction to central bank policy, our heatmap below is predominantly green for both the short and intermediate terms. Long-term readings are mixed.

Current Ideas:


MONDAY MORNING RISK MONITOR | EASY MONEY VS SLOWING GROWTH - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Positive / 4 of 12 improved / 0 out of 12 worsened / 8 of 12 unchanged
• Intermediate-term(WoW): Positive / 7 of 12 improved / 2 out of 12 worsened / 3 of 12 unchanged
• Long-term(WoW): Negative / 2 of 12 improved / 2 out of 12 worsened / 8 of 12 unchanged

MONDAY MORNING RISK MONITOR | EASY MONEY VS SLOWING GROWTH - RM15 2

 

1. U.S. Financial CDS – Swaps tightened for 13 out of 27 domestic financial institutions. Reaction was positive to the Federal Reserve's announcement that it would keep rates near zero and the subsequent low GDP reading of 1.5% with the median CDS spread tightening from 78 to 76 bps.

Tightened the most WoW: MMC, MBI, AXP
Widened the most WoW: CB, ACE, AIG
Tightened the most WoW: MMC, TRV, ALL
Widened the most MoM: CB, RDN, GNW

MONDAY MORNING RISK MONITOR | EASY MONEY VS SLOWING GROWTH - RM1

 

2. European Financial CDS – Swaps mostly widened in Europe last week, although the movement was muted. The median spread held steady at 75 bps.

MONDAY MORNING RISK MONITOR | EASY MONEY VS SLOWING GROWTH - RM2

 

3. Asian Financial CDS Chinese financial swaps continued to tighten, following the PBOC's decision to cut interest rates and reserve requirements in the prior week.

MONDAY MORNING RISK MONITOR | EASY MONEY VS SLOWING GROWTH - RM17

 

4. Sovereign CDS – Sovereign Swaps mostly tightened over last week. However, Portuguese swaps widened as the country's prime minister was sworn in for a second term as the head of a minority government that is expected to last less than two weeks given challenges from the socialist majority.

MONDAY MORNING RISK MONITOR | EASY MONEY VS SLOWING GROWTH - RM18

 

MONDAY MORNING RISK MONITOR | EASY MONEY VS SLOWING GROWTH - RM3

 

MONDAY MORNING RISK MONITOR | EASY MONEY VS SLOWING GROWTH - RM4


5. Emerging Market Sovereign CDS – Emerging market swaps mostly widened last week; Brazilian swaps, however, backed off -15 bps from their recent highs.

MONDAY MORNING RISK MONITOR | EASY MONEY VS SLOWING GROWTH - RM16

MONDAY MORNING RISK MONITOR | EASY MONEY VS SLOWING GROWTH - RM20

6. High Yield (YTM) Monitor – High Yield rates were unchanged, ending the week at 7.39%.

MONDAY MORNING RISK MONITOR | EASY MONEY VS SLOWING GROWTH - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index fell 3.0 points last week, ending at 1846.

MONDAY MORNING RISK MONITOR | EASY MONEY VS SLOWING GROWTH - RM6

8. TED Spread Monitor  – The TED spread fell 7 basis points last week, ending the week at 25 bps this week versus last week’s print of 32 bps.

MONDAY MORNING RISK MONITOR | EASY MONEY VS SLOWING GROWTH - RM7

9. CRB Commodity Price Index – The CRB index was unchanged, ending the week at 196. As compared with the prior month, commodity prices have increased 0.8%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR | EASY MONEY VS SLOWING GROWTH - 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 12 bps.

MONDAY MORNING RISK MONITOR | EASY MONEY VS SLOWING GROWTH - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index fell 11 basis points last week, ending the week at 1.80% versus last week’s print of 1.91%. 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 | EASY MONEY VS SLOWING GROWTH - RM10

12. Chinese Steel – Steel prices in China rose 0.6% last week, or 12 yuan/ton, to 2150 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 | EASY MONEY VS SLOWING GROWTH - RM12

13. 2-10 Spread – Last week the 2-10 spread tightened to 142 bps, -3 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | EASY MONEY VS SLOWING GROWTH - RM13

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 2.1% upside to TRADE resistance and 2.8% downside to TRADE support.

MONDAY MORNING RISK MONITOR | EASY MONEY VS SLOWING GROWTH - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT


Cartoon of the Day: Hard-Headed Bears

How's this for "hard data"? So far, 107 of 497 S&P 500 companies have reported aggregate sales and earnings growth of 4.4% and 13.2% respectively.

read more

Premium insight

McCullough [Uncensored]: When People Say ‘Everyone is Bullish, That’s Bulls@#t’

“You wonder why the performance of the hedge fund indices is so horrendous,” says Hedgeye CEO Keith McCullough, “they’re all doing the same thing, after the market moves. You shouldn’t be paid for that.”

read more

SECTOR SPOTLIGHT Replay | Healthcare Analyst Tom Tobin Today at 2:30PM ET

Tune in to this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more