Three major stimuli drove a marked increase in risk last week: a rising expectation for a Fed rate hike into an already slowing growth environment, European GDP growth coming in at a meager 0.3%, and Portugal's government effectively falling. Most notably, concerns over credit risk ballooned last week with the high yield YTM rising by +42 bps to 7.84% and the Euribor-OIS spread widened by +4 bps to 15 bps. Beyond this, the growing conviction for a December Fed rate hike has the dollar up and commodities down 4.8% on the week and 7.4% on the month. This is further exacerbating EM weakness in places like Brazil and Russia.
Short-term risk measures were mostly negative last week while intermediate-term measures were more positive and long-term measures were mixed.
Financial Risk Monitor Summary
• Short-term(WoW): Negative / 2 of 12 improved / 5 out of 12 worsened / 5 of 12 unchanged
• Intermediate-term(WoW): Positive / 6 of 12 improved / 4 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
1. U.S. Financial CDS – Swaps widened for 15 out of 27 domestic financial institutions. Bond insurers MBIA and Assured Guaranty CDS widened by 71 bps and 23 bps respectively on concerns that Puerto Rico is approaching default. Meanwhile, swaps for MGIC and Radian widened by 19 and 18 bps, respectively.
Tightened the most WoW: LNC, COF, JPM
Widened the most WoW: MBI, MTG, AGO
Tightened the most WoW: MMC, BAC, JPM
Widened the most MoM: ACE, RDN, CB
2. European Financial CDS – Swaps mostly widened in Europe last week as 3Q15 Eurozone GDP growth came in at only 0.3%. Portuguese and Greek CDS were outliers, as usual.
3. Asian Financial CDS – Swaps among Asian financials were mixed last week. Indian swaps were mostly wider on concerns over a rate hike by the U.S. Federal Reserve.
4. Sovereign CDS – Portuguese sovereign swaps widened by +45 bps to 215 as the country's government failed to pass its legislative program through the left-dominated parliament. Outside of Portugal, however, sovereign swaps were little changed.
5. Emerging Market Sovereign CDS – Emerging market swaps mostly widened last week on concerns over a stronger dollar from a possible Fed rate hike. Brazilian sovereign swaps widened the most, by +29 bps to 434.
6. High Yield (YTM) Monitor – High Yield rates rose 42 bps last week, ending the week at 7.84% versus 7.42% the prior week.
7. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 8.0 points last week, ending at 1837.
8. TED Spread Monitor – The TED spread fell 2 basis points last week, ending the week at 24 bps this week versus last week’s print of 26 bps.
9. CRB Commodity Price Index – The CRB index fell -4.8%, ending the week at 185 versus 194 the prior week. As compared with the prior month, commodity prices have decreased -7.4%. 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 widened by 4 bps to 15 bps.
11. Chinese Interbank Rate (Shifon Index) – The Shifon Index was unchanged vs last week, ending the week at 1.79%. 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 2.1% last week, or 45 yuan/ton, to 2107 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 143 bps, -1 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 2.0% upside to TRADE resistance and 1.1% downside to TRADE support.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT