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Takeaway: The ECB left rates unchanged, but Draghi's openness to further stimulus in Sep. gave markets something to pray for and pushed CDS tighter.

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Key Takeaway:

While the ECB left rates unchanged last week, Mario Draghi's signal that the central bank is open to further stimulus in September gave investors something to pray for and pushed European CDS another -4 bps tighter to 118. CDS in Asia also tightened last week, by -2 bps to 116, and the Canadian CDOR-OIS spread, a measure of counterparty risk in the Canadian banking system, tightened by -1 bps to 38. On the other hand, the price of Chinese steel fell -3.4% W/W.

Our heatmap below is positive across all durations.



Current Ideas:


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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 / 9 of 13 improved / 0 out of 13 worsened / 4 of 13 unchanged
• Long-term(WoW): Positive / 3 of 13 improved / 1 out of 13 worsened / 9 of 13 unchanged

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1. U.S. Financial CDS
– Swaps tightened for 9 out of 13 domestic financial institutions. With Goldman Sachs, Morgan Stanley, and Bank of America beating earnings expectations, moneycenter CDS tightened by an average -1 bps. Consumer finance and insurance CDS were flat on average.

Tightened the most WoW: HIG, GS, C
Widened the most WoW: AIG, WFC, AXP
Tightened the most WoW: JPM, BAC, C
Widened the most MoM: XL, CB, MTG

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2. European Financial CDS – Financials swaps mostly tightened in Europe last week. Although the ECB left rates unchanged last week, Mario Draghi signaled that the bank is open to further stimulus in September, providing some support to the market.

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3. Asian Financial CDS – All bank swaps in Asia tightened last week in broad optimism, besides Mizuho swaps, which were flat.

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4. Sovereign CDS – Sovereign swaps mostly tightened over last week. Portugal tightened the most, by -5 bps to 283. Meanwhile, Italian sovereign swaps widened by 4 bps to 135.

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5. Emerging Market Sovereign CDS – Emerging market swaps mostly widened last week. With the Turkish coup attempt, sovereign swaps for that country widened the most, rising by +50 bps to 275. Meanwhile, Brazilian swaps tightened by another -8 bps week over week to 287.

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6. High Yield (YTM) Monitor – High Yield rates fell 2 bps last week, ending the week at 6.40% versus 6.42% the prior week.

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7. Leveraged Loan Index Monitor  – The Leveraged Loan Index rose 7.0 points last week, ending at 1932.

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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 38 bps.

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9. CRB Commodity Price Index – The CRB index fell -3.0%, ending the week at 183 versus 189 the prior week. As compared with the prior month, commodity prices have decreased -3.1%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

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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 6 bps.

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11. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 2 basis points last week, ending the week at 2.02% 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.

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12. Chinese Steel – Steel prices in China fell 3.4% last week, or 89 yuan/ton, to 2521 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.

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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.

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14. Chinese Credit Outstanding – Chinese credit outstanding amounts to 151.0 trillion RMB as of June 30, 2016 (data released 7/14/2016), which is up +15.3 trillion RMB or +11.3% year over year. Month-over-month, credit is up +1,514 billion RMB or +1.0%. Note: this data is only updated monthly.

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15. 2-10 Spread – Last week the 2-10 spread tightened to 86 bps, -2 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

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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 38 bps.

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Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT



Patrick Staudt, CFA