Position: Long Germany (EWG); Short Euro (FXE), Short Italy (EWI), Short Spain (EWP)
With the BOE on hold this morning, maintaining its benchmark (repo) rate at 0.50% and asset purchasing program of 200 Billion Pounds, while inflationary pressures loom with CPI running above the bank’s target at over 3% annually, we thought it worth charting the developing divergence among select European economies by the fundamental metrics of: CPI, Unemployment, and GDP. We’re of the opinion that due to the ongoing Sovereign Debt “crisis” in Europe and the outcome of slower growth prospects across the region due to the issuance of austerity packages, many countries will have a difficult time arresting (or turning around) the divergences in the charts below over the intermediate term.
We maintain a bullish bias on Germany, yet caution that the DAX is reaching its immediate term TRADE overbought level and has sizable mean reversion risk (see yesterday’s post titled “Robust Germany”). We have a bearish bias on Europe’s fiscally bloated countries, which we think will continue to get “punished” by the market for carrying excessive public deficit and debt levels, and are short the EUR-USD with an immediate term TRADE range of $1.29-$1.34.