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Takeaway: Even with poor U.S. economic data and profits sliding at domestic moneycenter banks, investors remained an optimistic bunch last week.

 MONDAY MORNING RISK MONITOR | REACHING FOR OPTIMISM - RM11

Key Takeaway:

The reflationary bounce that took hold February 12th persists, in spite of generally weak economic data from the U.S. and profit pressures at J.P. Morgan, Bank of America, and Wells. Bank CDS tightened globally, while the YTM on high yield fell -33 bps to 7.60%.

Our heatmap below is positive on the short term, negative on the intermediate, and mixed on long-term readings.

Current Ideas:


MONDAY MORNING RISK MONITOR | REACHING FOR OPTIMISM - Best Ideas Table 2

Financial Risk Monitor Summary

• Short-term(WoW): Positive / 5 of 13 improved / 1 out of 13 worsened / 7 of 13 unchanged
• Intermediate-term(WoW): Negative / 4 of 13 improved / 5 out of 13 worsened / 4 of 13 unchanged
• Long-term(WoW): Negative / 2 of 13 improved / 2 out of 13 worsened / 9 of 13 unchanged

MONDAY MORNING RISK MONITOR | REACHING FOR OPTIMISM - RM15

1. U.S. Financial CDS – Swaps tightened for 12 out of 27 domestic financial institutions. Even with JPM, BAC, and WFC reporting sliding profits last week, their CDS tightened by -7 bps to 69, -8 bps to 98, and -5 bps to 58 respectively.

Tightened the most WoW: MS, MTG, JPM
Widened the most WoW: PRU, MET, LNC
Tightened the most WoW: LNC, JPM, GS
Widened the most MoM: MET, PRU, AIG

MONDAY MORNING RISK MONITOR | REACHING FOR OPTIMISM - RM1

2. European Financial CDS – Swaps mostly tightened in Europe as investors clung to optimism last week. The median spread tightened by -14 bps to 121.

MONDAY MORNING RISK MONITOR | REACHING FOR OPTIMISM - RM2

3. Asian Financial CDS – Swaps tightened nearly across the board in Asia last week. IDB Bank of India was the only one to widen, by 4 bps to 229. Even Chinese swaps tightened, where data released last week showed 1Q16 economic growth slowing to 6.7%, the slowest quarterly growth since 2009.

MONDAY MORNING RISK MONITOR | REACHING FOR OPTIMISM - RM17

4. Sovereign CDS – Sovereign swaps mostly tightened over last week. Italian and Spanish swaps tightened the most, by -7 bps to 129 and by -7 bps to 93 respectively.

MONDAY MORNING RISK MONITOR | REACHING FOR OPTIMISM - RM18

MONDAY MORNING RISK MONITOR | REACHING FOR OPTIMISM - RM3


5. Emerging Market Sovereign CDS – Emerging market swaps mostly tightened last week. In Brazil, where a congressional committee recommended that President Dilma Rousseff be impeached, swaps tightened by -48 bps to 342.

MONDAY MORNING RISK MONITOR | REACHING FOR OPTIMISM - RM16

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6. High Yield (YTM) Monitor – High Yield rates fell 33 bps last week, ending the week at 7.60% versus 7.93% the prior week.

MONDAY MORNING RISK MONITOR | REACHING FOR OPTIMISM - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index rose 13.0 points last week, ending at 1871.

MONDAY MORNING RISK MONITOR | REACHING FOR OPTIMISM - RM6

8. TED Spread Monitor  – The TED spread rose 1 basis points last week, ending the week at 41 bps this week versus last week’s print of 40 bps.

MONDAY MORNING RISK MONITOR | REACHING FOR OPTIMISM - RM7

9. CRB Commodity Price Index – The CRB index rose 3.6%, ending the week at 174 versus 168 the prior week. As compared with the prior month, commodity prices have decreased -1.5%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

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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 was unchanged at 10 bps.

MONDAY MORNING RISK MONITOR | REACHING FOR OPTIMISM - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 2 basis points last week, ending the week at 2.00% versus last week’s print of 1.98%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

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12. Chinese Steel – Steel prices in China rose 8.7% last week, or 229 yuan/ton, to 2,852 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 | REACHING FOR OPTIMISM - RM12

13. Chinese Non-Performing Loans Chinese non-performing loans amount to 1,274 billion Yuan as of Dec 31, 2015, 51.2% higher year-over-year.

MONDAY MORNING RISK MONITOR | REACHING FOR OPTIMISM - RM4

14. 2-10 Spread – Last week the 2-10 spread was unchanged at 102 bps. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | REACHING FOR OPTIMISM - RM13

15. 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 was unchanged at 41 bps.

MONDAY MORNING RISK MONITOR | REACHING FOR OPTIMISM - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT