Key Takeaway:
Investor hope/optimism that central banks would provide support following Britain's exit vote put risk measures into reverse last week. Domestic bank CDS, Asian bank CDS, and sovereign CDS all tightened, while European bank CDS held steady. Additionally, the Euribor-OIS spread, a measure of counterparty risk in Europe tightened on the week, the US high yield YTM dropped by -36 bps to 6.8%, and the price of Chinese steel bounced 3.6% W/W.
Our heatmap below is currently positive on the short term while, but mixed over the intermediate and longer term.
Current Ideas:
Financial Risk Monitor Summary
• Short-term(WoW): Positive / 6 of 13 improved / 1 out of 13 worsened / 6 of 13 unchanged
• Intermediate-term(WoW): Negative / 4 of 13 improved / 4 out of 13 worsened / 5 of 13 unchanged
• Long-term(WoW): Negative / 3 of 13 improved / 3 out of 13 worsened / 7 of 13 unchanged
1. U.S. Financial CDS – As fears over Brexit exit eased, swaps tightened for 8 out of 13 domestic financial institutions. While the median CDS remains 5 bps wider than one month ago, W/W it is -9 bps tighter at 91.
Tightened the most WoW: JPM, WFC, C
Widened the most WoW: PRU, MET, AIG
Widened the least/ tightened the most WoW: JPM, WFC, ACE
Widened the most MoM: PRU, AIG, HIG
2. European Financial CDS – Financials swaps mostly tightened in Europe last week. While the median CDS was unchanged at 138, the average move W/W was a -10 bps tightening as the BOE voiced a plan for interest rate cuts and Brexit fears eased somewhat.
3. Asian Financial CDS – Asian financials CDS were mixed last week. In China, bank swaps tightened significantly, between -17 and -20 bps. In India, 2/3 bank swaps tightened. Meanwhile, all Japanese CDS widened.
4. Sovereign CDS – Sovereign swaps mostly tightened over last week. Portuguese sovereign swaps tightened the most, by -35 bps to 290.
5. Emerging Market Sovereign CDS – Emerging market swaps mostly tightened last week. Brazilian swaps tightened the most, by -28 bps to 314.
6. High Yield (YTM) Monitor – High Yield rates fell 36 bps last week, ending the week at 6.81% versus 7.18% the prior week.
7. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 9.0 points last week, ending at 1904.
8. TED Spread Monitor – The TED spread rose 1 bps last week, ending the week at 40 bps this week versus last week’s print of 39 bps.
9. CRB Commodity Price Index – The CRB index rose 1.3%, ending the week at 194 versus 192 the prior week. As compared with the prior month, commodity prices have increased 3.0%. 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 4 bps to 7 bps.
11. Chinese Interbank Rate (Shifon Index) – The Shifon Index fell 1 bps last week, ending the week at 2.03% 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 rose 3.6% last week, or 85 yuan/ton, to 2434 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 149.5 trillion RMB as of May 31, 2016 (data released 6/15/2016), which is up +15.5 trillion RMB or +11.5% year over year. Month-over-month, credit is up +553 billion RMB or +0.4%. Note: this data is only updated monthly.
15. 2-10 Spread – Last week the 2-10 spread tightened to 85 bps, -8 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 39 bps.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
Patrick Staudt, CFA
