• It's Here!

    Etf Pro

    Get the big financial market moves right, bullish or bearish with Hedgeye’s ETF Pro.

  • It's Here

    MARKET EDGES

    Identify global risks and opportunities with essential macro intel using Hedgeye’s Market Edges.

Takeaway: Rising Fed expectations remain deflationary, while the situation in Europe is the exact opposite.

MONDAY MORNING RISK MONITOR | COMMODITY DEFLATION - RM11

Key Takeaway:

Global risk measures were bifurcated last week, dependent on each region's central bank behavior. U.S. bank swaps and the TED spread widened on Federal Reserve minutes showing that most FOMC participants thought conditions for a rate hike could be met by December. In contrast, European bank swaps tightened as ECB minutes conveyed a dovish position and suggested the possibility of further stimulus in December. Additionally, Chinese bank swaps tightened as the PBOC took measures to lower short-term rates.

The knock-on from Fed tightening expectations rising is that commodity prices boadly remain defalationary, falling 2.4% W/W and 5.2% M/M. One specific callout is Chinese steel, which shed another 2.3% W/W and remains in crash mode. Oddly, in spite of broad commodity deflation, sovereign swaps for Brazil and Russia both tightened materially on the week (-38 bps). 

Our heatmap below is predominantly negative in the short-, intermediate-, and long-term measures.

Current Ideas:

MONDAY MORNING RISK MONITOR | COMMODITY DEFLATION - RM19

Financial Risk Monitor Summary

• Short-term(WoW): Negative / 3 of 12 improved / 5 out of 12 worsened / 4 of 12 unchanged
• Intermediate-term(WoW): Negative / 5 of 12 improved / 6 out of 12 worsened / 1 of 12 unchanged
• Long-term(WoW): Negative / 2 of 12 improved / 3 out of 12 worsened / 7 of 12 unchanged

MONDAY MORNING RISK MONITOR | COMMODITY DEFLATION - RM15

1. U.S. Financial CDS – Swaps widened for 14 out of 27 domestic financial institutions. With Wednesday's FOMC minutes showing that most participants thought conditions for a rate hike could be met by the December meeting, the median swap widened by +2 bps from 73 to 75.

Tightened the most WoW: MTG, LNC, ACE
Widened the most WoW: CB, PRU, AXP
Tightened the most WoW: MMC, BAC, LNC
Widened the most MoM: CB, AIG, ACE

MONDAY MORNING RISK MONITOR | COMMODITY DEFLATION - RM1

2. European Financial CDS – Swaps mostly tightened in Europe last week as Wednesday's ECB minutes showed a strong possibility of further stimulus next month and ECB President Mario Draghi provided dovish rhetoric during a speech on Friday.

MONDAY MORNING RISK MONITOR | COMMODITY DEFLATION - RM2

3. Asian Financial CDS – In China, financial swaps tightened on news that the PBOC was cutting rates yet again. Additionally, India's ICICI Bank's swaps tightened significantly, falling -19 bps to 166.

MONDAY MORNING RISK MONITOR | COMMODITY DEFLATION - RM17

4. Sovereign CDS – Sovereign Swaps mostly tightened over last week. Portuguese sovereign swaps tightened the most, by -24 bps to 191.

MONDAY MORNING RISK MONITOR | COMMODITY DEFLATION - RM18

MONDAY MORNING RISK MONITOR | COMMODITY DEFLATION - RM3

MONDAY MORNING RISK MONITOR | COMMODITY DEFLATION - RM4


5. Emerging Market Sovereign CDS – Emerging market swaps mostly tightened last week. Russian and Brazilian swaps led the way, tightening by -39 bps to 253 and -38 bps to 396, respectively.

MONDAY MORNING RISK MONITOR | COMMODITY DEFLATION - RM16

MONDAY MORNING RISK MONITOR | COMMODITY DEFLATION - RM20

6. High Yield (YTM) Monitor – High Yield rates fell 3 bps last week, ending the week at 7.82% versus 7.84% the prior week.

MONDAY MORNING RISK MONITOR | COMMODITY DEFLATION - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index fell 5.0 points last week, ending at 1832.

MONDAY MORNING RISK MONITOR | COMMODITY DEFLATION - RM6

8. TED Spread Monitor  – The TED spread rose 4 basis points last week, ending the week at 28 bps this week versus last week’s print of 24 bps.

MONDAY MORNING RISK MONITOR | COMMODITY DEFLATION - RM7

9. CRB Commodity Price Index – The CRB index fell -2.4%, ending the week at 184 versus 188 the prior week. As compared with the prior month, commodity prices have decreased -5.2%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR | COMMODITY DEFLATION - 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 widened by 1 bps to 16 bps.

MONDAY MORNING RISK MONITOR | COMMODITY DEFLATION - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index was flat last week at 1.78%. 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 | COMMODITY DEFLATION - RM10

12. Chinese Steel – Steel prices in China fell 2.3% last week, or 48 yuan/ton, to 2059 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 | COMMODITY DEFLATION - RM12

13. 2-10 Spread – Last week the 2-10 spread tightened to 134 bps, -9 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | COMMODITY DEFLATION - RM13

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.3% upside to TRADE resistance and 1.2% downside to TRADE support.

MONDAY MORNING RISK MONITOR | COMMODITY DEFLATION - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT