With concern rising over both domestic growth slowing and economic weakness in China rising, global markets began the year with a bang. Even Friday's better than expected U.S. employment report was not enough to prop up markets. Notably, CDS spreads rose significantly last week across companies and sovereigns, while the TED Spread remains elevated and Euribor-OIS rose by +4 bps to 12 bps.
Our heatmap below is mostly negative across all durations.
Financial Risk Monitor Summary
• Short-term(WoW): Negative / 4 of 12 improved / 5 out of 12 worsened / 3 of 12 unchanged
• Intermediate-term(WoW): Negative / 3 of 12 improved / 7 out of 12 worsened / 2 of 12 unchanged
• Long-term(WoW): Negative / 1 of 12 improved / 4 out of 12 worsened / 7 of 12 unchanged
1. U.S. Financial CDS – Swaps widened for 16 out of 27 domestic financial institutions. With fears over weakness in China shaking markets, the median spread rose from 54 to 60 last week.
Widened the least/ tightened the most WoW: SLM, SLM, SLM
Widened the most WoW: AXP, ALL, MMC
Tightened the most WoW: AIG, JPM, CB
Widened the most MoM: ALL, COF, AXP
2. European Financial CDS – Swaps mostly widened in Europe last week. The median spread rose from 85 bps to 90 bps.
3. Asian Financial CDS – Worry over China dominated the risk environment last week and shook markets globally. Bank CDS in China rose between 4 bps and 20 bps.
4. Sovereign CDS – Sovereign swaps mostly widened over last week, led by Portuguese CDS, which widened by 11 bps to 182.
5. Emerging Market Sovereign CDS – Swaps in emerging markets reacted to the risk of waning Chinese demand, widening by 10 bps on average last week. Russian swaps widened by a significant 26 bps to 335 as oil prices continued to slide. Turkish sovereign swaps widened the most, by 29 bps to 302.
6. High Yield (YTM) Monitor – High Yield rates fell 61 bps last week, ending the week at 8.45% versus 9.06% the prior week.
7. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 3.0 points last week, ending at 1808.
8. TED Spread Monitor – The TED spread fell 3 basis points last week, ending the week at 42 bps this week versus last week’s print of 45 bps.
9. CRB Commodity Price Index – The CRB index fell -3.6%, ending the week at 169 versus 175 the prior week. As compared with the prior month, commodity prices have decreased -3.6%. 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 12 bps.
11. Chinese Interbank Rate (Shifon Index) – The Shifon Index fell 3 basis points last week, ending the week at 1.96% versus last week’s print of 1.99%. 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 rose 2.0% last week, or 41 yuan/ton, to 2042 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 118 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 4.1% upside to TRADE resistance and 0.1% downside to TRADE support.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT