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.
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
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
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.
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.
4. Sovereign CDS – Sovereign Swaps mostly tightened over last week. Portuguese sovereign swaps tightened the most, by -24 bps to 191.
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.
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.
7. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 5.0 points last week, ending at 1832.
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.
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.
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.
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.
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.
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.
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.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT