Most risk measures were neutral last week. U.S. financial CDS was unchanged at the median as there was little activity around the Thanksgiving holiday, although the TED spread, which tightened by -4 bps, signaled decreasing risk. In developments last week, Portugal's president appointed anti-austerity socialist leader António Costa as prime minister, causing volatility in private and sovereign CDS. Additionally, Russian and Turkish CDS widened, likely due in part to the conflict arising from Turkey downing a Russian jet on November 24. In Asia, risk measures were fairly muted, although Chinese steel prices continued to fall, dropping another -2% last week.
Short-term risk measures in our heatmap below are mostly neutral to negative. Intermediate- and long-term measures are mostly negative.
Financial Risk Monitor Summary
• Short-term(WoW): Negative / 2 of 12 improved / 3 out of 12 worsened / 7 of 12 unchanged
• Intermediate-term(WoW): Negative / 3 of 12 improved / 6 out of 12 worsened / 3 of 12 unchanged
• Long-term(WoW): Negative / 1 of 12 improved / 3 out of 12 worsened / 8 of 12 unchanged
1. U.S. Financial CDS – Swaps widened for 12 out of 27 domestic financial institutions. For the most part, activity was muted in the U.S. around the Thanksgiving holiday.
Tightened the most WoW: MMC, LNC, ACE
Widened the most WoW: CB, C, BAC
Tightened the most WoW: LNC, MMC, WFC
Widened the most MoM: CB, AXP, AIG
2. European Financial CDS – Swaps mostly tightened in Europe last week. Portugal and Russia were outliers. Portugal's Banco Espirito Santo's swaps widened by 21 bps to 629 as the country's president appointed anti-austerity socialist leader António Costa as prime minister. The widening is interesting because it conflicts with the movement on sovereign Portuguese CDS. The takeaway for Portugal is that, although last week's political development clears up weeks of conflict, it translates to uncertainty and volatility. Russia's Sberbank's CDS widened by 21 bps to 356, likely due in part to concerns over the economic implications of Turkey downing a Russian jet on November 24.
3. Asian Financial CDS – Swaps in the Asian region mostly widened last week, although only moderately with a 1 bps median change.
4. Sovereign CDS – Sovereign Swaps mostly tightened over last week. Spanish sovereign swaps tightened the most, by -5 bps to 83. In contrast to Portugal's Banco Espirito Santo's swaps widening, the country's sovereign CDS tightened by -4 bps following anti-austerity socialist leader António Costa's appointment as prime minister.
5. Emerging Market Sovereign CDS – Emerging market swaps mostly widened last week. Brazilian sovereign swaps widened the most, by 31 bps to 427. Additionally, Russian and Turkish swaps widened by 15 bps to 268 and by 16 bps to 257, likely in part due to the conflict arising from Turkey downing a Russian jet on November 24.
6. High Yield (YTM) Monitor – High Yield rates rose 12 bps last week, ending the week at 7.94% versus 7.82% the prior week.
7. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 4.0 points last week, ending at 1828.
8. TED Spread Monitor – The TED spread fell 4 basis points last week, ending the week at 24 bps this week versus last week’s print of 28 bps.
9. CRB Commodity Price Index – The CRB index fell -0.2%, ending the week at 183 versus 184 the prior week. As compared with the prior month, commodity prices have decreased -6.3%. 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 17 bps.
11. Chinese Interbank Rate (Shifon Index) – The Shifon Index was flat at 1.79% last week. 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 2.0% last week, or 42 yuan/ton, to 2017 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 130 bps, -4 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 1.1% upside to TRADE resistance and 1.3% downside to TRADE support.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT