Key Takeaway:
Risk measures were subdued last week. However, the price for Chinese steel continued to drop, falling by another 5% last week, bringing the month-over-month change to -21% as the mid-February to mid-April artificial reflation trade unwinds.
Our heatmap below is mostly neutral on the short term, negative on the intermediate, and positive on long-term readings.
Current Ideas:
Financial Risk Monitor Summary
• Short-term(WoW): Negative / 1 of 13 improved / 1 out of 13 worsened / 11 of 13 unchanged
• Intermediate-term(WoW): Negative / 4 of 13 improved / 6 out of 13 worsened / 3 of 13 unchanged
• Long-term(WoW): Positive / 3 of 13 improved / 2 out of 13 worsened / 8 of 13 unchanged
1. U.S. Financial CDS – Swaps tightened for 8 out of 13 domestic financial institutions. Sub-sectors were mixed; moneycenter CDS mostly tightened, consumer finance swaps were mixed, and insurance swaps tightened.
Tightened the most WoW: AIG, HIG, PRU
Widened the most WoW: C, JPM, BAC
Tightened the most WoW: PRU, MET, AXP
Widened the most MoM: GS, HIG, MS
2. European Financial CDS – Financials swaps mostly tightened in Europe last week, with the median CDS tightening by -9 bps to 117.
3. Asian Financial CDS – Financials swaps in China and India mostly tightened last week. Interestingly, bank swaps in Japan mostly widened despite the country's 1Q GDP growth coming in higher than expected at +1.7% Q/Q.
4. Sovereign CDS – Sovereign swaps were little changed last week. Portuguese swaps widened the most, rising by +5 bps to 266.
5. Emerging Market Sovereign CDS – Emerging market swaps mostly widened last week, led by Brazil and Russia where CDS widened by +17 bps to 346 and +14 bps to 268 respectively.
6. High Yield (YTM) Monitor – High Yield rates rose 2 bps last week, ending the week at 7.42% versus 7.40% the prior week.
7. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 5.0 points last week, ending at 1896.
8. TED Spread Monitor – The TED spread fell 1 basis point last week, ending the week at 35 bps this week versus last week’s print of 36 bps.
9. CRB Commodity Price Index – The CRB index rose 0.5%, ending the week at 184 versus 183 the prior week. As compared with the prior month, commodity prices have increased 2.5%. 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 8 bps.
11. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 1 basis point last week, ending the week at 2.01% versus last week’s print of 2.00%. 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 5.0% last week, or 132 yuan/ton, to 2502 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 1,392 billion Yuan as of March 31, 2016, which is up +41.7% 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 148.7 trillion RMB as of April 30, 2016, which is up +11.9% year over year. Note: this data is only updated monthly.
15. 2-10 Spread – Last week the 2-10 spread widened to 96 bps, 1 bps wider 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 40 bps.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
