The pound has lost -12.6% of it's value (against the U.S. dollar) year-to-date as U.K. growth has slowed.
Takeaway: The 10s/2s yield spread is a classic #LateCycle economic indicator that's been signaling global #GrowthSlowing for some time now.
It's simple. Around the world the sovereign bond 10s/2s yield spread is screaming global #GrowthSlowing. While central planners plug their ears, here are four charts of the yields spread, and their year-to-date compression, from the U.K., U.S., Germany and Japan that plainly illustrate the dour economic outlook.
We're just measuring and mapping the cycle and the vast majority of economic indicators are flashing red.
In this brief excerpt from The Macro Show, Hedgeye Financials analyst Josh Steiner discusses some disconcerting new developments related to Australia’s housing bubble.
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The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.
Takeaway: "You’d have to go back to July '07 for the last time delinquency rates had risen by 30bps y-o-y. And we know where the world stood then."
In this excerpt from The Macro Show earlier today, Hedgeye Financials analyst Josh Steiner dissects the credit cycle and specifically the detereorating data points embedded in credit card lender Capital One's business.
"Capital One is the largest U.S. subprime lender out there. Subprime lending, defined by the credit card lending industry as FICO sub-660, makes up roughly a third of their book. This chart [see below] shows the year-over-year rate of change in delinquencies in their U.S. credit card business.
As you can see, as of the latest data, delinquencies are up 35 bps year-over-year and its actually been accelerating now, really for the better part of the last year. In fact, as you go back a bit further, it bottomed out in early 2015 and, for the better part of the last 18 months, was getting less good but is now decidedly deteriorating.
Just to give you a bit of a time reference point, you’d have to go back to July of 2007 for the last time that delinquency rates had risen by 30bps year-over-year. And we know where the world stood in July of 2007.
So its not just that the market is at a toppy valuation, which it is. You’ve also got de facto indications that credit quality is deteriorating from Capital One, the largest US subprime lender in the country. Again, beware the siren song. I would not be chasing the market up here."
In this complimentary edition of About Everything, Hedgeye Demography Sector Head Neil Howe discusses the media hype surrounding virtual reality versus "the next big thing [that] may already be sitting in your pocket: augmented reality." Howe breaks down the key takeaways and explains the broader implications for investors.
Takeaway: Without much news out, markets broadly followed oil prices higher, as OPEC announced it will hold an informal meeting in September.
Without much news out last week, markets broadly followed oil prices higher, as OPEC announced it will hold an informal meeting in September. CDS tightened globally, the high yield YTM fell by -16 bps to 6.33%, and the price of Chinese steel rose 1.5%.
Our heatmap below is positive across all durations.
Financial Risk Monitor Summary
• Short-term(WoW): Positive / 5 of 13 improved / 2 out of 13 worsened / 6 of 13 unchanged
• Intermediate-term(WoW): Positive / 5 of 13 improved / 2 out of 13 worsened / 6 of 13 unchanged
• Long-term(WoW): Positive / 4 of 13 improved / 1 out of 13 worsened / 8 of 13 unchanged
1. U.S. Financial CDS – Swaps tightened for 11 out of 13 domestic financial institutions as investors defaulted to optimism without much news last week but with oil prices pushing higher.
Tightened the most WoW: BAC, C, AXP
Widened the most WoW: HIG, COF, UNM
Widened the least/ tightened the most WoW: LNC, COF, UNM
Widened the most MoM: AIG, JPM, GS
2. European Financial CDS – Financials swaps mostly tightened in Europe last week. Portugal, however, was an outlier. CDS for its Banco Espirito Santo widened by 98 bps to 1188.
3. Asian Financial CDS – Financials swaps mostly tightened in Asia last week. Only Nomura Holdings CDS widened minimally, by 1 bps to 80.
4. Sovereign CDS – Sovereign swaps mostly tightened over last week. However, Italian sovereign CDS widened by 6 bps to 132.
5. Emerging Market Sovereign CDS – Emerging market swaps mostly tightened last week. Russian sovereign swaps, however, stood out with a move 13 bps wider to 231.
6. High Yield (YTM) Monitor – High Yield rates fell 16 bps last week, ending the week at 6.33% versus 6.49% the prior week.
7. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 4.0 points last week, ending at 1938.
8. TED Spread Monitor – The TED spread rose 1 bps last week, ending the week at 54 bps this week versus last week’s print of 53 bps.
9. CRB Commodity Price Index – The CRB index rose 1.6%, ending the week at 183 versus 180 the prior week. As compared with the prior month, commodity prices have decreased -3.3%. 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 5 bps.
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.
12. Chinese Steel – Steel prices in China rose 1.5% last week, or 39 yuan/ton, to 2617 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 1,437 billion Yuan as of June 30, 2016, which is up +31.6% 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 151.4 trillion RMB as of July 31, 2016 (data released 8/12/2016), which is up +15.0 trillion RMB or +11.0% year over year. Month-over-month, credit is up +374 billion RMB or +0.2%. Note: this data is only updated monthly.
15. 2-10 Spread – Last week the 2-10 spread tightened to 81 bps, -6 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 40 bps.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
Patrick Staudt, CFA
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