Key Takeaway:
While domestic markets reacted positively to Friday's NFP figure, worry over Brexit effects is still rising in Europe. In the U.S., financials CDS tightened by -6 bps to 85, and the high yield YTM fell by -15 bps to 6.66%. Meanwhile, in Europe financials CDS widened by 8 bps to 146. Additionally, sovereign CDS widened by 5 bps to 114.
Aside from the problems in Europe, we remind investors of the growing risk in China's loan market. Last week, MNI reported that its measure of bank NPLs in China now exceeds 2 trillion CNY, and the NPL ratio has risen to 2.15% as of May, up from 1.85% at the end of 1Q16.
Our heatmap below is positive on all durations.
Current Ideas:
Financial Risk Monitor Summary
• Short-term(WoW): Positive / 4 of 13 improved / 3 out of 13 worsened / 6 of 13 unchanged
• Intermediate-term(WoW): Positive / 6 of 13 improved / 4 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 12 out of 13 domestic financial institutions as investors were encouraged by Friday's NFP report.
Tightened the most WoW: BAC, C, MS
Widened the most WoW: MET, RDN, GNW
Tightened the most WoW: WFC, JPM, BAC
Widened the most MoM: MET, PRU, HIG
2. European Financial CDS – Financials swaps mostly widened in Europe last week as investors in the region continue to worry over Brexit effects.
3. Asian Financial CDS – Financials swaps in Asia mostly widened last week with the median rising from 125 to 126.
4. Sovereign CDS – Sovereign swaps mostly widened over last week. Portuguese sovereign swaps led the move, widening by 24 bps to 314.
5. Emerging Market Sovereign CDS – Emerging market swaps mostly tightened last week. Turkish swaps tightened the most, by -11 bps to 229.
6. High Yield (YTM) Monitor – High Yield rates fell 15 bps last week, ending the week at 6.66% versus 6.81% the prior week.
7. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 6.0 points last week, ending at 1910.
8. TED Spread Monitor – The TED spread fell 1 bps last week, ending the week at 39 bps this week versus last week’s print of 40 bps.
9. CRB Commodity Price Index – The CRB index fell -3.8%, ending the week at 187 versus 195 the prior week. As compared with the prior month, commodity prices have decreased -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 was unchanged at 7 bps.
11. Chinese Interbank Rate (Shifon Index) – The Shifon Index fell 3 basis points last week, ending the week at 2.00% versus last week’s print of 2.03%. 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 3.3% last week, or 81 yuan/ton, to 2515 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 75 bps, -10 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 was unchanged at 40 bps.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
Patrick Staudt, CFA