What a difference a week makes. After coming off new lows in high yield and leveraged loans the prior week, this past Friday showed a marked turnaround, which will surely be furthered based on China's currency news over the weekend. Overall, seven out of eight risk metrics were positive on the margin week over week. The only outlier was Greek bond yields, which increased dramatically, indicating that risk in the Eurozone should not be considered resolved.
Our risk monitor looks at the following metrics weekly:
1. CDS for all available US Financials (30 companies).
2. High Yield
3. Leveraged Loans
4. TED Spread
5. Journal of Commerce Commodity Price Index
6. Greek Bond Spreads
7. Markit Subprime Spreads
8. AAII Bulls/Bears Sentiment Survey
1. Financials CDS Monitor – Significant improvement across the board in credit default swaps for US financials last week. Every US Financial we track tightened, and all but one (PGR) saw double-digit improvement on a percentage basis. This is the best performance we've seen out of this metric in at least five weeks. Even the worst performers, the Spanish banks, only expanded 2-3%. Conclusion: Positive.
Contracted the most vs last week: ACE, ALL, XL, TRV
Widened the most vs last week: BBVA-ES, POP-ES, PAS-ES, BKT-ES
Contracted the most vs last month: COF, AIG, GNW, MMC
Widened the most vs last month: SAB-ES, ACE, POP-ES, PAS-ES
2. High Yield (YTM) Monitor - High Yield rates fell 35 bp in a straight line last week last week. Rates closed the week at 8.94% down from 9.29% the week prior. Conclusion: Positive.
3. Leveraged Loan Index Monitor - Leveraged loans rose last week, closing at 1463, up 10 bp from 1453 the week prior. Conclusion: Positive.
4. TED Spread Monitor - The TED Spread is a great canary. It came in modestly last week, closing at 44.4 bps down from 46.8 bps in the week prior. Conclusion: Positive.
5. Journal of Commerce Commodity Price Index – This week the JOC smoothed commodity price index is a useful leading indicator. A sharp sell-off in this index starting in July ’08 heralded further declines in the stock market. This week, the index rose from 15.47 last Friday to 16.48 on Friday. Conclusion: Positive.
6. Greek Bond Yields Monitor - The Greece situation remains in flux and so we include Greek Bond 10-Year Yields as a reflection of that dynamic. In contrast to the broadly positive signals from the rest of the risk monitor, Greek bond yields increased significantly, closing the week at 942 bps, up from 818 the week prior. Conclusion: Negative.
7. Markit ABX Index Monitor - We use the 2006-2 series and look at the AAA, AA, A and BBB- series. The Markit ABX Index was generally up vs the prior week. We include this measure as a reflection of what is going on in deep subprime distressed paper. Conclusion: Positive.
8. AAII Bulls/Bears Monitor - The Bulls/Bears survey grew more Bullish on the margin vs last week. Bulls increased by 8% to 42.5% while Bears fell 12.4% to 30.7%, putting the spread at 12% on the bullish side, versus 9% to the bearish side last week. (One caveat is that our interpretation of the AAII Bulls/Bears survey is that a more bearish reading is bearish. Most market observers would use this survey as a contrarian indicator, which we wouldn't disagree with from a practitioner standpoint. However, for the purposes of this risk monitor, we treat an increase in bearish sentiment as a negative.) Conclusion: Positive.
Joshua Steiner, CFA