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MONDAY MORNING RISK MONITOR | CHINA, NON-PERFORMING LOANS, AND COUNTERPARTY RISK

Takeaway: China's slowdown continues to grip markets, the ECB is investigating NPLs across the Eurozone, and the Euribor-OIS spread rises a bit.

MONDAY MORNING RISK MONITOR | CHINA, NON-PERFORMING LOANS, AND COUNTERPARTY RISK - RM11

 

Key Takeaway:

Slowing growth continued to grip global markets last week. Data came out showing that Chinese 4Q GDP decelerated to 6.8% y/y from 6.9% in 3Q, driving CDS in the U.S., Europe, and Asia higher.  Additionally, the Euribor-OIS spread, a measure of counterparty risk in the Eurozone, widened by +2 bps last week, and concern over non-performing loans has reached the point that the ECB announced it is investigating a number of Eurozone banks about their management of such loans. Italian Banco Popolare confirmed that it is undergoing such an investigation, and its CDS widened by +63 bps to 333.

 

Another measure of counterparty risk, which we have added to the bottom of our monitor this week, is the CDOR-OIS spread. It is the Canadian equivalent of the Euribor-OIS spread and measures the difference between the Canadian interbank lending rate and overnight indexed swaps. In other words, it measures counterparty risk in the Canadian banking system. The measure hitting a post-crisis high of 50 bps on January 15 prompted us to start tracking it. The spread has since tightened somewhat to 38 bps but remains elevated.

 

Our heatmap below remains mostly negative across all durations.

 

Current Ideas: 


MONDAY MORNING RISK MONITOR | CHINA, NON-PERFORMING LOANS, AND COUNTERPARTY RISK - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Negative / 2 of 13 improved / 5 out of 13 worsened / 6 of 13 unchanged
• Intermediate-term(WoW): Negative / 5 of 13 improved / 6 out of 13 worsened / 2 of 13 unchanged
• Long-term(WoW): Negative / 1 of 13 improved / 5 out of 13 worsened / 7 of 13 unchanged

MONDAY MORNING RISK MONITOR | CHINA, NON-PERFORMING LOANS, AND COUNTERPARTY RISK - RM15

 

 

1. U.S. Financial CDS – Swaps widened for 10 out of 27 domestic financial institutions with an average change of +2 bps as concerns over slowing Chinese growth and low oil prices continued to drive risk concerns. At the bottom of our U.S. CDS table below, we have added indices on investment grade and high yield CDS, which tightened last week by -6 bps to 104 and by -31 bps to 525, respectively.


Tightened the most WoW: ACE, MMC, CB
Widened the most WoW: AIG, AXP, BAC
Widened the least/ tightened the most WoW: CB, MTG, AGO
Widened the most MoM: AIG, AXP, COF

MONDAY MORNING RISK MONITOR | CHINA, NON-PERFORMING LOANS, AND COUNTERPARTY RISK - RM1

 

2. European Financial CDS – Swaps mostly widened for European banks last week. With low oil prices one of the driving factors in market weakness, Russian Sberbank CDS continued to be significantly affected, widening by +32 bps to 445. In Italy, Banco Popolare CDS widened by +63 bps to 333 as it announced the ECB is investigating the bank's management of non-performing loans. Additionally, in Portugal, with the issue of transferring risk between Novo Banco and Banco Espirito Santo remaining volatile, Banco Espirito Santo CDS tightened by -291 to 937.

MONDAY MORNING RISK MONITOR | CHINA, NON-PERFORMING LOANS, AND COUNTERPARTY RISK - RM2

 

3. Asian Financial CDS – Swaps mostly widened across Asian Financials last week, rising by +6 bps on average. Indian bank swaps saw the widest moves, increasing between +11 and +16 bps.

MONDAY MORNING RISK MONITOR | CHINA, NON-PERFORMING LOANS, AND COUNTERPARTY RISK - RM17

 

4. Sovereign CDS – Sovereign Swaps mostly widened over last week. Portuguese swaps widened the most, by +16 bps to 209.

MONDAY MORNING RISK MONITOR | CHINA, NON-PERFORMING LOANS, AND COUNTERPARTY RISK - RM18

 

MONDAY MORNING RISK MONITOR | CHINA, NON-PERFORMING LOANS, AND COUNTERPARTY RISK - RM3

 

MONDAY MORNING RISK MONITOR | CHINA, NON-PERFORMING LOANS, AND COUNTERPARTY RISK - RM4


5. Emerging Market Sovereign CDS – Emerging market swaps recovered somewhat from recent widening last week, tightening by -6 bps to 223 at the median, although still higher by +18 bps month over month.

MONDAY MORNING RISK MONITOR | CHINA, NON-PERFORMING LOANS, AND COUNTERPARTY RISK - RM16

MONDAY MORNING RISK MONITOR | CHINA, NON-PERFORMING LOANS, AND COUNTERPARTY RISK - RM20

6. High Yield (YTM) Monitor – High Yield rates rose 1 bps last week, ending the week at 8.98% versus 8.97% the prior week.

MONDAY MORNING RISK MONITOR | CHINA, NON-PERFORMING LOANS, AND COUNTERPARTY RISK - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index fell 9.0 points last week, ending at 1793.

MONDAY MORNING RISK MONITOR | CHINA, NON-PERFORMING LOANS, AND COUNTERPARTY RISK - RM6

8. TED Spread Monitor  – The TED spread fell 7 basis points last week, ending the week at 32 bps this week versus last week’s print of 39 bps.

MONDAY MORNING RISK MONITOR | CHINA, NON-PERFORMING LOANS, AND COUNTERPARTY RISK - RM7

9. CRB Commodity Price Index – The CRB index rose 0.9%, ending the week at 164 versus 162 the prior week. As compared with the prior month, commodity prices have decreased -7.0%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR | CHINA, NON-PERFORMING LOANS, AND COUNTERPARTY RISK - 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 2 bps to 14 bps.

MONDAY MORNING RISK MONITOR | CHINA, NON-PERFORMING LOANS, AND COUNTERPARTY RISK - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 7 basis points last week, ending the week at 2.03% versus last week’s print of 1.96%. 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 | CHINA, NON-PERFORMING LOANS, AND COUNTERPARTY RISK - RM10

12. Chinese Steel – Steel prices in China rose 0.8% last week, or 16 yuan/ton, to 2025 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 | CHINA, NON-PERFORMING LOANS, AND COUNTERPARTY RISK - RM12

13. 2-10 Spread – Last week the 2-10 spread was unchanged at 118 bps lats week. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | CHINA, NON-PERFORMING LOANS, AND COUNTERPARTY RISK - RM13

14. CDOR-OIS Spread – The CDOR-OIS spread is the Canadian equivalent of the Euribor-OIS spread. It is the difference between the Canadian interbank lending rate and overnight indexed swaps, and it measures bank counterparty risk in Canada. The CDOR-OIS spread tightened by 13 bps to 38 bps last week.

 

MONDAY MORNING RISK MONITOR | CHINA, NON-PERFORMING LOANS, AND COUNTERPARTY RISK - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT


The Macro Show Replay | January 25, 2016

 


Summary and Replay | THE IRAN FACTOR

Last Friday we hosted a call with former Energy Secretary Spencer Abraham and Senior Energy Analyst Joe McMonigle, co-founders of the Abraham Group, LLC. The company is an independent and international strategic consulting firm focused on the energy sector and based in Washington D.C. As part of our acquisition of Potomac Research, we’re pleased to announce our new strategic partnership with The Abraham Group, LLC.

 

VIDEO Replay Link

 

SLIDE DECK    

 

 

Below we offer a summary of the most important discussion points:

  • Iran’s most immediate goal, regardless of oil prices, is to ramp up production and re-enter global energy markets. They are perfectly willing to continue cutting official selling prices to regional benchmarks.
  • Without the help of international capital assistance, Iran can ramp up production by 700K B/D by the end of March, equivalent to another Libya coming online in 2014. In our estimation most sources have underestimated this number. Low oil prices will not deter this ramp in production.
  • The 40-50MM barrels that Iran has floating in offshore storage would translate to about 150-200K B/D that is available for immediate delivery. We believe Iran has lined up buyers for their floating storage (India Europe likely first two destinations).
  • U.S. sanctions related to human rights and terrorism still apply to transactions involving:
    • U.S. banks, insurers, and most importantly transactions in US$
    • Iran’s hardline elite with new sanctions slapped on companies accused of supporting Iran’s ballistic missile program

Consensus opinion is that shipping and marine insurers worldwide will move slowly in partnering with commercial tankers that would step up and transport Iranian crude and condensate. We believe these negotiations may develop faster than consensus expects.

  • Iran’s domestic economy (not just trade) far beyond the energy industry is dependent on foreign capital. For one, domestic primary energy consumption is up 50% in 10-years. Attracting this capital is reliant on complying with stipulations under sanctions relief. Our expectation is that they will cooperate in order to attain full and permanent sanctions belief.
  • Despite being geopolitically aligned with Iran, Russia and Iran may be in competition from an energy trade perspective. The EU is making a concerted effort to diversify away from Russian energy dependence. Russia took many of Iran’s clients, especially in Southern Europe, after the EU import ban and tanker shipping insurance sanctions enacted in July 2012.

 

Ben Ryan

Analyst 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.57%

Volatility, Oil and Italy

Client Talking Points

VIX

After a 2-day bounce in oversold beta all of the bottom callers came back, but day 2 of that came on one of the lightest U.S. Equity Volume days of the year (-9% vs 1 month average) and front-month VIX didn’t come close to breaking any lines of support.

OIL

Oil led the bounce (that hasn’t been a good thing for 18 months), up +5.9% on the week for WTI. But it is straight back down -3% this morning after failing at all lines of @Hedgeye resistance – risk range there = $28.21-32.68; Oil Volatility (OVX) = 62!

ITALY

It was a big week for the Italian (Draghi wins central planner of the week), but it was a bad week for Italy, closing down -0.9% was the MIB Index (in a week almost everything bounced) which remains in crash mode, as does Spain and Germany (-20% or more from peak).

 

*Tune into The Macro Show with Hedgeye CEO Keith McCullough live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 64% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 21% INTL CURRENCIES 15%

Top Long Ideas

Company Ticker Sector Duration
XLU

Utilities (XLU) continue to be the bright spot in the equity markets for 2016. XLU is up 1% this year, having edged out all other S&P 500 subsectors by a wide margin. Last week, XLU was down marginally but was still second best among the subsectors, beating all but Healthcare (XLV). Essentially, it's paying off to own low-beta XLU in a crashing market.

GIS

General Mills (GIS) has turned on its advertising for no artificial colors and flavors in its cereal, as well as an increased effort for its gluten free campaign. Click here to view the 30 second spot TV commercial.

 

These steps taken on cereal, coupled with improved merchandise planning across their portfolio in the second half should bode well for the company’s future performance. Additionally, General Mills fits neatly into the style factors that we like from a macro point of view, large cap, low beta and liquidity.

TLT

Rating agency S&P disclosed on Thursday three concerning stats as it relates to the wellness of credit oustanding:

  • More companies were at risk of having their credit ratings cut at the end of December than at the close of any other year since 2009
  • The number of potential downgrades was at 655, compared with 824 reported by the finish of 2009
  • The year-end total for 2015 was "exceptionally" higher than a yearly average of 613

 

Then on Friday, S&P followed with additional action:

  • Disclosure that oil-exporting countries face fresh downgrades as crude prices fall further and that it could repeat last year's move when it made a big group of cuts all at once
  • S&P currently has Azerbaijan, Bahrain, Kazakhstan, Oman, Russia, and Saudi Arabia on negative outlook in its Europe, Middle East and Africa region, as well as Brazil and Venezuela in Latin America

Moody’s echoed the shaky state of credit markets by announcing it was putting the ratings of 120 oil and gas companies on watch Friday.

 

Strap on your seatbelts as we expect that credit spreads will continue to widen. If the Fed pivots on its “4 rate hikes” in 2016 as the data continues to slow, Treasury bond yields get pushed lower and high-yield spreads widen into a late cycle deleveraging. This should continue to generate alpha in a Short JNK, Long TLT trade.

Three for the Road

TWEET OF THE DAY

POTOMAC INSIGHT | Washington To Wall Street: What To Watch With JT Taylor https://app.hedgeye.com/insights/48721-potomac-insight-washington-to-wall-street-what-to-watch-with-jt-tay… via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

A person who won’t read has no advantage over one who can’t read.

Mark Twain                                    

STAT OF THE DAY

The Singapore Straits Times Index is up only 0.2% on the bounce, it remains in #crash mode, down -26.7% from 2015 high.


CHART OF THE DAY: A Look At What's Hammering Consensus Macro In 2016

CHART OF THE DAY: A Look At What's Hammering Consensus Macro In 2016 - 01.25.16 chart

 

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more.

 

"... The real monsters that have been hammering Consensus Macro in 2016 are as follows:

  1. #Deflation (China, Oil, EM, etc.)
  2. US #GrowthSlowing from its Super #LateCycle peak
  3. Illiquidity & Leverage

Unfortunately, Illiquidity (institutional investors can’t get out of small/mid cap equity and junk bond exposures) and Leverage (hedge funds running 150-250% “gross long”, growth slowing companies like IBM levering up to buy back stock, the largest $ amount of corporate credit outstanding in human history, etc.), wasn’t objectively discussed @Davos."

 


Winter Was Coming

“They were born on the wrong side of the wall – it doesn’t make them monsters.”

-Jon Snow

 

If you live on the Eastern sea-board of the United States of America, unfortunately there was no central plan to smooth out this weekend’s storm. Winter was coming and how non-linear going from 0 to 2-3 feet of the white walker’s fury that was!

 

Pardon the pun, but in Stark contrast to the White Walkers (evil dudes) in Game of Thrones, the Wildlings (gnarly dudes) are called the “free folk.” John Snow was the great leader who empathized with their plight for freedom. They weren’t the movie’s real monsters.

 

To some, maybe this Thunder Bay Bear was born on the wrong side of the Old Wall. Who I am and what I stand for certainly makes for some “us vs. them” drama. After “taking a knee” on last week’s lows, I am back on the field of battle this morning. Grrr!

 

Winter Was Coming - smiling bear

 

Back to the Global Macro Grind

 

Scary growl, eh. Yeah, I can be a real scary dude; especially when I don’t have my makeup on (or when I try to find reasons to be bullish). Bullish on “reflation” or the prospects for US growth magically re-accelerating to its cycle peak of 2015, that is.

 

The real monsters that have been hammering Consensus Macro in 2016 are as follows:

 

  1. #Deflation (China, Oil, EM, etc.)
  2. US #GrowthSlowing from its Super #LateCycle peak
  3. Illiquidity & Leverage

 

Unfortunately, Illiquidity (institutional investors can’t get out of small/mid cap equity and junk bond exposures) and Leverage (hedge funds running 150-250% “gross long”, growth slowing companies like IBM levering up to buy back stock, the largest $ amount of corporate credit outstanding in human history, etc.), wasn’t objectively discussed @Davos.

 

I think that’s mainly because of real-world economic ignorance, willful blindness (compensation), and some form of fictional peddling. Since few (if any) called for this great US Dollar Denominated Liquidity Trap to manifest as the US Dollar Index broke out from 40-year-centrally-planned lows (Bernanke’s QE3 in 2011), what would there be for an academic paid to advise a banker to discuss?

 

Since it’s easy to argue that all that was core to the ideology of using “monetary policy tools, innovations, and communications” was one of the causal factors in perpetuating one mother of a #Bubble in inflation expectations, over-supply, and bad investor behavior (chasing Kinder’s lure of a levered yield), the Old Wall Folk would have to bear some responsibility in the discussion.

 

Back to what really happened last week (hint: one more of the many counter-TREND bounces):

 

  1. US Equities rallied off oversold lows (SP500 +1.4% on the week to -6.7% YTD)
  2. Total US Equity Market Volume had its slowest day (down -9% vs. its 1-month avg) on a +2% Friday (SP500)
  3. Oil (WTI) led the counter-TREND bounce with a +5.9% ramp to -15.7% YTD
  4. Copper had 2x the bounce of the SP500, closing +3.0% to -6.2% YTD
  5. MLP stocks “beat the Dow” at +1.1% vs. +0.7% on the week, but are still in crash mode -17.7% YTD

 

I’m pretty sure that’s not how the Old Wall’s media recapped the week. In other reality-check news:

 

  1. Our favorite US Equity Sector Style (Utilities, XLU) closed up another +0.9% to +1.2% YTD
  2. Our least favorite Equity Sector (Financials, XLF) closed down another -0.7% to -10.7% YTD

Yeah, that’s a bummer – when the “market is up” and the sector the “rate hike” bulls like the most was down (again). But that’s to be expected by those of us longer-term investors who understand Lower-For-Longer (US 10yr Yield -23 basis points YTD at 2.04%).

 

The only thing other than maybe Ukrainian and Italian stocks (down -7.9% and -0.9% on the week, respectively, in a globally “up” tape), that I can find worse than being long the Financials (on a week where Jaime Dimon called everything fine) was:

 

  1. High Beta Stocks down another -1.6% week-over-week to -13.7% YTD
  2. Low Beta Stocks up +0.1% week-over-week to -2.1% YTD

*Mean Performance of Top Quintile vs. Bottom Quintile (SP500 Companies)

 

In other words, if all you’ve done in 2016 was express the Illiquidity & Leverage trade in High vs. Low Beta portfolio positioning, never mind charging 2 & 20 for that – you could probably come back as Steve Cohen and charge 5 & 50!

 

Not to be completely out-done by the weather-trade (ex-the-pending-slow-volume-storm-prep-day, the SP500 is down closer to -8.5% YTD!) one of our Top 3 Macro Long Ideas right now (the US Dollar) had another solid week, +0.6% at +1.0% YTD.

 

I know. Being long Greenbacks, Utes, and the Long-Bond is boring. But sometimes, in the #GameOfSlowing (Q4 2015 Hedgeye Macro Theme) playing the low-beta, low-leverage strategy works. Finally, since I’m up off my knee, I’ll remind you of Cersei Lannister’s advice:

 

“When you play the Game of Thrones, you win or you die.”

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.96-2.09%

SPX 1

VIX 20.43-28.91
YEN 116.51-118.99
Oil (WTI) 28.21-32.68

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Winter Was Coming - 01.25.16 chart


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