Key Takeaway:
Although data last week showed European GDP growing faster than expected, investors were more focused on the ongoing deceleration in U.S. economic growth, which came in at a low 0.5% annualized rate for 1Q15. Bank CDS widened globally, the TED spread widened by 2 bps to 43, the CDOR-OIS spread widened by 1 bps to 44, and the price of Chinese steel fell -2.3% last week. Our heatmap below is negative on the short term, positive on the intermediate, and mixed on long-term measures.
Current Ideas:
Financial Risk Monitor Summary
• Short-term(WoW): Negative / 3 of 13 improved / 7 out of 13 worsened / 3 of 13 unchanged
• Intermediate-term(WoW): Positive / 7 of 13 improved / 4 out of 13 worsened / 2 of 13 unchanged
• Long-term(WoW): Negative / 2 of 13 improved / 2 out of 13 worsened / 9 of 13 unchanged
1. U.S. Financial CDS – Swaps mostly widened for domestic financial institutions. Slower than expected U.S. economic growth affected moneycenter bank CDS the most; swaps in that group widened by an average 8 bps.
Tightened the most WoW: PRU, MET, LNC
Widened the most WoW: GS, HIG, MS
Tightened the most WoW: BAC, C, MS
Widened the most MoM: HIG, AIG, AXP
2. European Financial CDS – Financial swaps mostly widened in Europe last week. Greek and Portuguese bank swaps stood out, with the Greek banks widening between 107 and 444 bps and Banco Espirito Santo widening by 241 bps to 1396.
3. Asian Financial CDS – Financial swaps in Asia mostly widened last week. The median CDS widened by 8 bps to 145.
4. Sovereign CDS – Sovereign swaps mostly tightened over last week. Portuguese swaps tightened the most, by -8 bps to 254, as the ratings agency DBRS confirmed the country's BBB rating with stable outlook.
5. Emerging Market Sovereign CDS – Emerging market swaps mostly widened last week, although Brazil stood out on the opposite end of the spectrum, tightening by -19 bps to 340.
6. High Yield (YTM) Monitor – High Yield rates fell 12 bps last week, ending the week at 7.39% versus 7.51% the prior week.
7. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 8.0 points last week, ending at 1893.
8. TED Spread Monitor – The TED spread rose 2 basis points last week, ending the week at 43 bps this week versus last week’s print of 40 bps.
9. CRB Commodity Price Index – The CRB index rose 1.7%, ending the week at 185 versus 181 the prior week. As compared with the prior month, commodity prices have increased 9.9%. 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 tightened by 1 bps to 9 bps.
11. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 1 basis point last week, ending the week at 2.05% versus last week’s print of 2.04%. 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 72 yuan/ton, to 3075 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.
13. Chinese Non-Performing Loans Chinese non-performing loans amount to 1,274 billion Yuan as of Dec 31, 2015, which is up +51.2% year over year. Given the growing focus on China's debt growth and the potential fallout, we've decided to begin tracking loan quality. Note: this data is only updated quarterly.
14. 2-10 Spread – Last week the 2-10 spread tightened to 105 bps, -2 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.
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 widened by 1 bps to 44 bps.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
