Key Takeaway:
In the approach to the New Year holiday, risk measures were mostly neutral for another week, although China did see some mixed readings; the average price for Chinese steel dropped -3.3% while the Chinese Interbank Rate came in by -9 bps to 2.23%.
Our heatmap below is neutral on the short-term and positive on the intermediate- and long-term durations.
Current Ideas:
Financial Risk Monitor Summary
• Short-term(WoW): Negative / 1 of 13 improved / 1 out of 13 worsened / 11 of 13 unchanged
• Intermediate-term(WoW): Positive / 8 of 13 improved / 2 out of 13 worsened / 3 of 13 unchanged
• Long-term(WoW): Positive / 3 of 13 improved / 0 out of 13 worsened / 10 of 13 unchanged
1. U.S. Financial CDS – Swaps tightened for 9 out of 16 domestic financial institutions. Movement was overall neutral with the median change at 0 bps.
Tightened the most WoW: ALL, MMC, HIG
Widened the most WoW: COF, CB, WFC
Tightened the most WoW: ALL, MMC, MS
Widened the most MoM: COF, JPM, AIG
2. European Financial CDS – Financials swaps mostly tightened in Europe last week. Portugal's Banco Espirito Santo was an outlier, however, widening by 172 bps to 1761.
3. Asian Financial CDS – In China last week, financials swaps were mixed. In Japan, bank CDS were mixed. Meanwhile, all Indian banks saw their swaps widen, between 2 and 3 bps.
4. Sovereign CDS – Sovereign swaps mostly tightened over last week. Spanish swaps tightened the most, by -4 bps to 76.
5. Emerging Market Sovereign CDS – Emerging market swaps mostly tightened last week. Turkish sovereign swaps, however, were an outlier, widening by 2 bps to 273.
6. High Yield (YTM) Monitor – High Yield rates fell 4 bps last week, ending the week at 6.41% versus 6.45% the prior week.
7. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 4.0 points last week, ending at 2001.
8. TED Spread Monitor – The TED spread rose 1 bps last week, ending the week at 50 bps this week versus last week’s print of 49 bps.
9. CRB Commodity Price Index – The CRB index rose 0.9%, ending the week at 193 versus 191 the prior week. As compared with the prior month, commodity prices have increased 0.4%. 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 3 bps.
11. Chinese Interbank Rate (Shifon Index) – The Shifon Index fell 9 basis points last week, ending the week at 2.23% versus last week’s print of 2.32%. 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 fell 3.3% last week, or 113 yuan/ton, to 3341 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 1,494 billion Yuan as of September 30, 2016, which is up +25.9% 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 156.8 trillion RMB as of November 30, 2016 (data released 12/12/2016), which is up +16.6 trillion RMB or +11.8% year over year. Month-over-month, credit is up +1,654 billion RMB or +1.1%. Note: this data is only updated monthly.
15. 2-10 Spread – Last week the 2-10 spread tightened to 126 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 was unchanged at 44 bps.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
Patrick Staudt, CFA
