MONDAY MORNING RISK MONITOR | RISING RATES

Takeaway: Friday's employment report poses the risk of catalyzing an ill-timed rate hike, but investors seem focused only on the positive.

 

MONDAY MORNING RISK MONITOR | RISING RATES - RM11

 

Key Takeaway:

Global risk perception eased last week. In the U.S., investors reacted positively to Friday's jobs report. In China, the rising stock market has taken focus away from the real risk of slowing economic growth. In Greece, the ECB released a stress test showing that the country's banks require a €14.4 billion recapitalization, and investors reacted positively to the upcoming capital inflow.

 

Looking ahead, the biggest risk we highlight is that of the Federal Reserve raising interest rates into slowing economic growth.

 

Our heatmap below is predominantly green on both the short and intermediate term. Long-term measures are mixed.

 

Current Ideas:

MONDAY MORNING RISK MONITOR | RISING RATES - 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 / 8 of 12 improved / 2 out of 12 worsened / 2 of 12 unchanged
• Long-term(WoW): Negative / 2 of 12 improved / 2 out of 12 worsened / 8 of 12 unchanged

MONDAY MORNING RISK MONITOR | RISING RATES - RM15

 

1. U.S. Financial CDS – Swaps tightened for 20 out of 27 domestic financial institutions on Friday's jobs report, which surged to 271k.

Tightened the most WoW: CB, ALL, JPM
Widened the most/ tightened the least WoW: GNW, AIG, SLM
Tightened the most WoW: MMC, ALL, BAC
Widened the most MoM: GNW, RDN, CB

MONDAY MORNING RISK MONITOR | RISING RATES - RM1

 

2. European Financial CDS – Swaps mostly tightened in Europe last week, due in part to the positive U.S. jobs report. Additionally, Greek bank CDS tightened between -811 bps and -2434 bps in response to the upcoming  €14.4 billion recapitalization of the country's banks. 

MONDAY MORNING RISK MONITOR | RISING RATES - RM2

 

3. Asian Financial CDS – China's stock market surged, the government released its ban on IPOs, and financials CDS tightened modestly.

MONDAY MORNING RISK MONITOR | RISING RATES - RM17

 

4. Sovereign CDS – Sovereign Swaps mostly tightened over last week. Italian sovereign swaps tightened the most, falling -4 bps to 99.

MONDAY MORNING RISK MONITOR | RISING RATES - RM18

 

MONDAY MORNING RISK MONITOR | RISING RATES - RM3

 

MONDAY MORNING RISK MONITOR | RISING RATES - RM4


5. Emerging Market Sovereign CDS – Emerging market swaps mostly tightened last week. Brazilian swaps tightened the most, falling -35 bps to 405.

MONDAY MORNING RISK MONITOR | RISING RATES - RM16

MONDAY MORNING RISK MONITOR | RISING RATES - RM20

6. High Yield (YTM) Monitor – High Yield rates rose 2 bps last week, ending the week at 7.42% versus 7.39% the prior week.

MONDAY MORNING RISK MONITOR | RISING RATES - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index fell 1.0 point last week, ending at 1845.

MONDAY MORNING RISK MONITOR | RISING RATES - RM6

8. TED Spread Monitor – The TED spread was unchanged last week at 26 bps.

MONDAY MORNING RISK MONITOR | RISING RATES - RM7

9. CRB Commodity Price Index – The CRB index fell -2.1%, ending the week at 191 versus 195 the prior week. As compared with the prior month, commodity prices have decreased -5.8%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR | RISING RATES - 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 tightened by 1 bps to 11 bps.

MONDAY MORNING RISK MONITOR | RISING RATES - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index fell 1 basis point last week, ending the week at 1.79% versus last week’s print of 1.80%. 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 | RISING RATES - RM10

12. Chinese Steel – Steel prices in China rose 0.1% last week, or 2 yuan/ton, to 2152 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 | RISING RATES - RM12

13. 2-10 Spread – Last week the 2-10 spread widened to 144 bps, 2 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | RISING RATES - RM13

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.5% upside to TRADE resistance and 3.4% downside to TRADE support.

MONDAY MORNING RISK MONITOR | RISING RATES - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT


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