Key Takeaway:
A number of U.S. economic measures raised concern for the market last week; the ISM Manufacturing Index came in lower than expected at 50.8, jobless claims rose by +17k (the largest w/w increase all year), and April jobs growth came in lower than expected at +160k. Beyond this, commodity prices began to roll over, taking high yield prices with and EM sovereign CDS with them. Chinese steel was down for the first time since mid-February, CRB declined, and high yield YTM rose. Beyond this, the median sovereign CDS widened by +3 bps to 100; Italy and Spain caught the brunt of investors' concerns with their respective CDS widening by +9 bps to 127 and by +10 bps to 97.
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 / 1 of 13 improved / 3 out of 13 worsened / 9 of 13 unchanged
• Intermediate-term(WoW): Positive / 7 of 13 improved / 3 out of 13 worsened / 3 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 – With weak economic data last week such as a lower than expected ISM Manufacturing Index, rising jobless claims, and slower than expected job growth, swaps widened for 14 out of 16 domestic financial institutions and the median spread widened by 2 bps to 102.
Tightened the most WoW: COF, JPM, PRU
Widened the most WoW: HIG, AIG, LNC
Tightened the most WoW: RDN, BAC, C
Widened the most MoM: HIG, AIG, AXP
2. European Financial CDS – Financial institution swaps mostly widened in Europe last week, led by Portuguese Banco Espirito Santo swaps, which widened by 150 to 1546.
3. Asian Financial CDS – Financials CDS in Asia were mixed last week. 2 of 3 Chinese bank swaps widened, and both Japanese Daiwa and Nomura swaps widened. Meanwhile, all Indian bank swaps tightened.
4. Sovereign CDS – Sovereign Swaps mostly widened over last week. Spanish sovereign swaps widened the most, by 10 bps to 97.
5. Emerging Market Sovereign CDS – Emerging market swaps mostly widened last week, led by Turkish sovereign swaps, which widened by 27 bps to 267. Meanwhile, Indian CDS stood out as the only EM sovereign swap to tighten, by -5 bps to 161.
6. High Yield (YTM) Monitor – High Yield rates rose 7 bps last week, ending the week at 7.46% versus 7.39% the prior week.
7. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 1.0 points last week, ending at 1892.
8. TED Spread Monitor – The TED spread rose 1 basis point last week, ending the week at 43 bps this week versus last week’s print of 43 bps.
9. CRB Commodity Price Index – The CRB index fell -1.4%, ending the week at 180 versus 182 the prior week. As compared with the prior month, commodity prices have increased 5.2%. 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 was unchanged at 9 bps.
11. Chinese Interbank Rate (Shifon Index) – The Shifon Index fell 5 basis points last week, ending the week at 2.00% versus last week’s print of 2.05%. 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 5.2% last week, or 160 yuan/ton, to 2915 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. Chinese Credit Outstanding – Chinese credit outstanding amounts to 148 trillion RMB as of March 31, 2016, which is up +12.3% year over year. Note: this data is only updated quarterly.
15. 2-10 Spread – Last week the 2-10 spread tightened to 104 bps, -1 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.
16. 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 1 bps to 43 bps.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
