Position: Long Germany (EWG)
Today, European equities rallied off oversold levels (gaining +1.75%-4% across the region), however we’re interpreting the move as just that, a dead-cat bounce. The headline risk associated with Europe’s sovereign debt contagion that has markets punishing countries with over-extended public debts and deficits is severe and should weigh to the downside over the next 3-5 years.
As we’ve shown in our research, despite the bailout package for Greece (May 2010) and the assurance of one in Ireland (Nov. 2010) credit spreads continue to widen as investors demand further protection to own the debt of Europe’s periphery and sell out of their positions as the Crisis in Confidence persists (see chart below).
We don't believe recent statements from Eurocrats that speak to the contrary:
(12/1) Portugal’s PM Jose Socrates: “I do not see any reason to change the position of the Portuguese government which is very clear: we do not need any help…”
(12/1) Deutsche Bank’s CEO Josef Ackermann: “Investors’ mistrust of Spain is unjustified and the problems in the banking industry are manageable.”
Also, a quick look at select equity markets of debt and deficit bloated countries shows just how severe the recent run (inclusive of today’s bounce) has been. Here is the performance since the weekend of November 20-21 when Ireland confirmed its “need” for a €85 Billion bailout from the EU/IMF: Italy’s MIB FTSE -6.0%; Portugal’s PSI 20 -5%; Ireland’s ISEQ -4%; Spain’s IBEX -4.0%.
The Euro has also corrected severely against major currencies, including versus the USD, down -4% since 11/19. Our immediate term TRADE range for the EUR-USD is $1.29-$1.33.
As the PIIGS remain mired in the muck, we continue to like Germany due to its fiscal conservatism and profitable industrial and exporting base. As the chart below shows, its unemployment rate has steadily declined over the last year to 7.5%, far outpacing the Eurozone average that ticked up 10bps to 10.1% in the most recent month and the scary base levels of 20.7% in Spain or 13.5% in Ireland. Further, German companies continue to outpace their peers, finding strong demand at home and abroad (especially China).
German Retail Sales reported today gained a healthy +2.3% in October month-over-month.
Finally, Manufacturing PMI figures were released for 15 European countries today. As the chart below shows, 10 countries saw an improvement while 5 contracted month-over-month. The notable call-out here is Italy, which contracted to the downside and teeters above the 50 line that divides expansion (above 50) and contraction (below 50). For more on our bearish bias on Italy see our portal.
We’ll be looking to tactically short European countries with sovereign debt risk in the Hedgeye Portfolio. Stay tuned.