Key Takeaway:
- Default pricing held relatively flat across our sample of domestic, European, and Asian financial institutions.
- The average yield charged to domestic, below investment-grade issuers currently sits +0.1% above its 150 DMA on a M/M basis.
- The Treasury-Eurodollar (TED) spread, a measure of credit risk in the general economy, sits +2.4% above its 150 DMA on a M/M basis.
- The CRB Commodities index is up +12 pts or +6.2% M/M, largely driven up by the recent rally in oil.
- Chinese steel futures fell notably for a third straight week last week, with the average rebar price falling -247 CNY/Tonne or -5.7%, signalling a slowdown in demand and a loss of steam across the general manufacturing sector. On a M/M basis, Chinese steel has fallen -782 CNY/Tonne or -15.9%.
- The 2-10 spread continues to stagnate following a demonstrated decline since last December as trending disinflation and disinflationary expectations hold down long-term rates while fed hikes provide support underneath the short-end, culminating in a flattening yield curve.
Our heatmap below is signalling positive across short, medium, and long-term durations.
Current Ideas:
Financial Risk Monitor Summary
• Short-term(WoW): Negative / 3 of 13 improved / 5 out of 13 worsened / 5 of 13 unchanged
• Intermediate-term(WoW): Positive / 5 of 13 improved / 3 out of 13 worsened / 5 of 13 unchanged
• Long-term(WoW): Positive / 4 of 13 improved / 1 out of 13 worsened / 5 of 13 unchanged
1. U.S. Financial CDS – Swaps widened for 17 out of 26 domestic financial institutions.
Tightened the most WoW: AGO, RDN, MTG
Widened the most WoW: MMC, ALL, AIG
Tightened the most MoM: AGO, TRV, NAVI
Widened the most MoM: MMC, GNW, HIG
2. European Financial CDS – Financials swaps mostly widened in Europe last week.
3. Asian Financial CDS – Financials swaps mostly tightened across our sample of Asian financial institutions last week.
4. Sovereign CDS – Sovereign swaps mostly tightened over last week. Spanish sovereign swaps tightened by -6 bps to 45 bps.
5. Emerging Market Sovereign CDS – Emerging market swaps mostly tightened last week. Russian swaps tightened by -6 bps to 110 bps.
6. High Yield (YTM) Monitor – High Yield rates fell -2 bps last week, ending the week at 5.54% versus 5.56% the prior week.
7. Leveraged Loan Index Monitor – The Leveraged Loan Index rose +4.0 points last week, ending at 2077.
8. TED Spread Monitor – The TED spread fell -2 bps last week, ending the week at 28 bps this week versus last week’s print of 30 bps.
9. CRB Commodity Price Index – The CRB index rose +0.4%, ending the week at 196 versus 195 the prior week. As compared with the prior month, commodity prices have increased +6.2%. 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 tightened by -1 bp to 1 bp.
11. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose +35 basis points last week, ending the week at 2.83% versus last week’s print of 2.48%. 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 -5.7% last week, or -247 CNY/tonne, to 4,123 CNY/tonne. 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 CNY 1,670 billion as of September 30, 2017, which is up CNY +11.8% 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 CNY 177.0 trillion as of December 31, 2017 (data released 1/12/2018), which is up CNY +18.5 trillion or +11.7% year over year. Month-over-month, credit is up CNY +1,061 billion or +0.6%. Note: this data is only updated monthly.
15. 2-10 Spread – Last week the 2-10 spread widened to 55 bps, +3 bps wider 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 +3 bps to 41 bps.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
