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A Look At How Central Planners Are Crushing Banks

A Look At How Central Planners Are Crushing Banks - Financials cartoon May 2016

 

Banks stocks around the world continue to crash today. No, it's not post-Brexit fallout. It's just another case of maniacal central planning gone awry. 

 

The latest news comes from Italy. Here's the wrap from the Wall Street Journal:

 

"In Italy, 17% of banks’ loans are sour. That is nearly 10 times the level in the U.S., where, even at the worst of the 2008-09 financial crisis, it was only 5%. Among publicly traded banks in the eurozone, Italian lenders account for nearly half of total bad loans."

 

Isn't it ironic that the European Commission authorized €150 billion in liquidity support for Italian banks last week? This measure will prove counterproductive as the ECB maintains its negative interest rate policy (NIRP). With no end in sight, Eurozone banks will continue to see a squeeze in their net interest margins. 

 

So, while financial media continues to frame Italian banks as the problem child of Europe, it's more appropriate to turn your attention to the ECB. To be clear, central bank policies have been ravaging Europe's banks for quite some time now. Since the ECB announced NIRP in June 2014, European bank stocks are down -48% versus -6.1% for Euro Stoxx 600. 

 

A Look At How Central Planners Are Crushing Banks - european banks

 

Same story in Japan...

 

The BoJ announced NIRP in January 2016. Since then, Japanese bank stocks are down -27.3% versus -12.3% for the Topix.

 

A Look At How Central Planners Are Crushing Banks - japan bank

 

Meanwhile in the U.S. 

 

Year-to-date, Financials (XLF) remain the worst performing sector in the S&P 500. The XLF is down -6.2% as the Fed has dialed back its rate hike rhetoric. The 10s/2s Treasury yield spread (a rate of change proxy for US growth and bank earnings via net interest margins) hit a cycle low today. (Incidentally, Financials remain our favorite 2016 sector short.)

 

As desperate central planners push interest rates ever lower, banks are apparently struggling to make a profit.

 

Who'd have thought?


McCullough: What Is Plunging 10-Year Yield Telling Investors?

In this brief excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough takes a look at U.S. bond yields sinking to record lows and what may lie ahead.

 

Subscribe to The Macro Show today for access to this and all other episodes. 

 

Subscribe to Hedgeye on YouTube for all of our free video content.


What The Mainstream Media Missed About All-Time Lows For 10-Year Yield

Takeaway: All-time lows in the 10-year Treasury yield is continued vindication for our Macro team's #GrowthSlowing call.

What The Mainstream Media Missed  About All-Time Lows For 10-Year Yield - bond yields 

 

All-time lows in 10-year Treasury yields this morning.

 

Yup. 

 

Yet more vindication of our Macro team's global #GrowthSlowing call.

 

Here's brief analysis from Hedgeye CEO Keith McCullough in a note sent to subscribers earlier this morning:

 

"While “stocks” have these 1-week ramps, you have to take on a lot of volatility to time those returns – with the Long Bond and it’s proxies, both absolute and volatility adjusted returns have been awesome. All-time low this am for the US 10yr of 1.38% ahead of the Friday jobs report and the Q2 Earnings Recession season."

 

 

Macro tourists and the mainstream media missed an important callout in reporting fresh lows for sovereign bond yields this morning...

 

The 10s/2s Treasury yield spread (a rate of change proxy for US growth and bank earnings) hit a new low for #TheCycle of 80bps today:

 

What The Mainstream Media Missed  About All-Time Lows For 10-Year Yield - yield spread 7 5

 

That's why our favorite macro call, long the Long Bond (TLT), continues to outperform:

 

What The Mainstream Media Missed  About All-Time Lows For 10-Year Yield - tlt v spy 7 5

 

In short, the bond market has figured out what still puzzles most stock-centric investors...

 

Global #GrowthSlowing continues to rule the day


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.38%
  • SHORT SIGNALS 78.41%

RTA Live: July 5, 2016


Daily Market Data Dump: Tuesday

Takeaway: A closer look at global macro market developments.

Editor's Note: Below are complimentary charts highlighting global equity market developments, S&P 500 sector performance, volume on U.S. stock exchanges, and rates and bond spreads. It's on the house. For more information on how Hedgeye can help you better understand the markets and economy (and stay ahead of consensus) check out our array of investing products

 

CLICK TO ENLARGE

 

Daily Market Data Dump: Tuesday - equity markets 7 5

 

Daily Market Data Dump: Tuesday - sector performance 7 5 16

 

Daily Market Data Dump: Tuesday - volume 7 5

 

Daily Market Data Dump: Tuesday - rates and spreads 7 5

 

Daily Market Data Dump: Tuesday - currencies 7 5


TUESDAY MORNING RISK MONITOR | HOPING FOR CENTRAL BANK SUPPORT

Takeaway: With investors hopeful that central banks will provide support following Britain's exit vote, risk measures eased last week.

 

TUESDAY MORNING RISK MONITOR | HOPING FOR CENTRAL BANK SUPPORT - RM11

 

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:

TUESDAY MORNING RISK MONITOR | HOPING FOR CENTRAL BANK SUPPORT - RM19

 

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

TUESDAY MORNING RISK MONITOR | HOPING FOR CENTRAL BANK SUPPORT - RM15


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

TUESDAY MORNING RISK MONITOR | HOPING FOR CENTRAL BANK SUPPORT - RM1

 

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.

TUESDAY MORNING RISK MONITOR | HOPING FOR CENTRAL BANK SUPPORT - RM2

 

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.

TUESDAY MORNING RISK MONITOR | HOPING FOR CENTRAL BANK SUPPORT - RM17

 

4. Sovereign CDS – Sovereign swaps mostly tightened over last week. Portuguese sovereign swaps tightened the most, by -35 bps to 290.

TUESDAY MORNING RISK MONITOR | HOPING FOR CENTRAL BANK SUPPORT - RM18

 

TUESDAY MORNING RISK MONITOR | HOPING FOR CENTRAL BANK SUPPORT - RM3


5. Emerging Market Sovereign CDS – Emerging market swaps mostly tightened last week. Brazilian swaps tightened the most, by -28 bps to 314.

TUESDAY MORNING RISK MONITOR | HOPING FOR CENTRAL BANK SUPPORT - RM16

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.

TUESDAY MORNING RISK MONITOR | HOPING FOR CENTRAL BANK SUPPORT - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index rose 9.0 points last week, ending at 1904.

TUESDAY MORNING RISK MONITOR | HOPING FOR CENTRAL BANK SUPPORT - RM6

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.

TUESDAY MORNING RISK MONITOR | HOPING FOR CENTRAL BANK SUPPORT - RM7

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.

TUESDAY MORNING RISK MONITOR | HOPING FOR CENTRAL BANK SUPPORT - RM8

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.

TUESDAY MORNING RISK MONITOR | HOPING FOR CENTRAL BANK SUPPORT - RM9

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.

TUESDAY MORNING RISK MONITOR | HOPING FOR CENTRAL BANK SUPPORT - RM10

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.

TUESDAY MORNING RISK MONITOR | HOPING FOR CENTRAL BANK SUPPORT - RM12

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.

TUESDAY MORNING RISK MONITOR | HOPING FOR CENTRAL BANK SUPPORT - RM4

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.

TUESDAY MORNING RISK MONITOR | HOPING FOR CENTRAL BANK SUPPORT - RM20

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.

TUESDAY MORNING RISK MONITOR | HOPING FOR CENTRAL BANK SUPPORT - RM13

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.

TUESDAY MORNING RISK MONITOR | HOPING FOR CENTRAL BANK SUPPORT - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT

Patrick Staudt, CFA 



Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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