Position: Long Germany (EWG); Short Italy (EWI) and Euro (FXE)
European equity markets are trading down today across the board after two days of strong performance. FTSE -0.7%; DAX -0.3%; CAC -0.1%. The PIIGS are currently trading higher than their morning open of ~ -100bps, however Portugal’s equity market is flashing a negative divergence at -1.1%.
The Key Story is the Inflection in Inflation Expectations:
Today European Central Bank council member Axel Weber said the "economic outlook in the euro area has improved markedly and inflation risks could increase." This comes on the heels of ECB President Jean-Claude Trichet saying yesterday that he’s willing to raise rates to fight inflation.
CPI Data out today confirms these inflationary pressures: Spain saw a significant gain and inflation pushing higher in the UK will put further pressure on the BOE to act (see chart below).
Germany CPI: 1.9% in Dec. Y/Y (Final Reading) vs. 1.6% in November (the fastest acceleration in more than two years)
Spain CPI: 2.9% Dec. Y/Y (Final Reading) vs. 2.2%
Eurozone CPI : 2.2% in Dec Y/Y (Final Reading) vs. 1.9%
UK PPI Input: 3.4% in Dec. M/M vs 0.9%
12.5% in Dec. Y/Y vs 9.2%
UK PPI Output: 0.5% in Dec. M/M vs 0.4%
4.2% in Dec. Y/Y vs 4.1%
EU Car Demand Low:
In contrast to Weber’s economic outlook, a report on EU (25 countries) New Car Registrations out today fell -3.2% in December versus -7.1% in November and largely reflected difficult comps due to strong demand last year associated with country-specific “cash (subsidy) for clunkers” programs throughout Europe, according to the European Automobile Manufacturers’ Association.
The highlights of the report include:
- Ford Motor Co., Fiat SpA and Toyota Motor Corp. led a ninth consecutive monthly drop in European auto sales
- Ford’s registrations plunged -26% in December Y/Y; Fiat’s -19%; and Toyota’s -7.6%
- Demand in the region fell 2.7% percent to 1.05 million, however December registrations rose 6.9% in Germany, Europe’s biggest market
We continue to remain bullish on Germany, and are currently long the country via the etf EWG in the Hedgeye Virtual Portfolio.
Euro Strengthening:
The euro got a further lift today against major currencies, including the USD, currently trading at $1.3386, after comments today from French Finance Minister Christine Lagarde that Europe is "looking at raising the EFSF (the bailout fund) and is considering broadening the scope of the fund’s powers."
From a catalyst perspective we continue to believe that European markets and the euro will be supported over the near-term by discussion next week in Brussels by European finance ministers on initial details of a more "comprehensive (bailout) package". Further, German Finance Minister Wolfgang Schaeuble said yesterday that the EU member states will assemble this package by March when EU leaders are schedule to meet for a summit.
We’ll continue to keep you ahead of Europe’s sovereign debt issue. As soon as next week we could learn considerably more about funding for future country bailouts.
Have a nice long weekend,
Matthew Hedrick
Analyst
