Key Takeaway:
Chinese steel prices resumed their collapse last week, falling by 7.4% w/w and have now retraced ~2/3 of their rally since February. We continue to view China's reflationary credit push in 1Q as the proximate cause for much of the broader-based commodities/EM rebound and so it's relevant that Steel prices are again collapsing.
In the US, the week ended on a positive note, characterized by better than expected Durable Goods orders (+3.4% m/m) and better initial jobless claims (-10k w/w). A closer look, however, reveals that Durable Goods ex-aircraft orders were a more meager +0.6% m/m (-0.4% y/y), and initial jobless claims, while down on the week, are now up y/y for the second consecutive week. Finally, while GDP was upwardly revised to +80 bps from +50 bps, the Fed appears increasingly likely to raise at its next meeting, which will likely put the current rally into reverse in short order.
Current Ideas:
Financial Risk Monitor Summary
• Short-term(WoW): Positive / 4 of 13 improved / 1 out of 13 worsened / 8 of 13 unchanged
• Intermediate-term(WoW): Positive / 7 of 13 improved / 3 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 13 out of 13 domestic financial institutions, and the median spread fell by -4 bps to 87.
Tightened the most WoW: AXP, C, AIG
Widened the most WoW: ACE, AGO, AON
Tightened the most WoW: PRU, AXP, JPM
Widened the most MoM: MMC, SLM, ACE
2. European Financial CDS – Financials swaps mostly tightened in Europe last week. In particular, Greek bank swaps tightened between -96 and -221 bps as the Eurozone and IMF reached a deal to allow for new Greek loans and agreed on how the country could receive more debt relief in the future.
3. Asian Financial CDS – Asian financials swaps were mostly tighter to flat last week, although those for IDB Bank of India widened significantly by 20 bps to 256.
4. Sovereign CDS – Sovereign swaps mostly tightened over last week, led by Portuguese swaps which tightened by -5 bps to 261.
5. Emerging Market Sovereign CDS – Emerging market swaps mostly tightened last week, led by Russia and Turkey, the swaps for which tightened by -6 bps to 262 and by -6 bps to 274 respectively. Meanwhile, Brazilian sovereign swaps widened by 5 bps to 350.
6. High Yield (YTM) Monitor – High Yield rates fell 12 bps last week, ending the week at 7.29% versus 7.42% the prior week.
7. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 7.0 points last week, ending at 1903.
8. TED Spread Monitor – The TED spread rose 1 basis point last week, ending the week at 36 bps this week versus last week’s print of 35 bps.
9. CRB Commodity Price Index – The CRB index rose 0.4%, ending the week at 186 versus 185 the prior week. As compared with the prior month, commodity prices have increased 0.8%. 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 1 basis point last week, ending the week at 2.00% versus last week’s print of 2.01%. 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 7.4% last week, or 185 yuan/ton, to 2317 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 tightened to 94 bps, -2 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 widened by 1 bps to 41 bps.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
