Europe Is Offside

Position: Short Italy (EWI); Short Euro (FXE)


In a post on 1/27 titled “Playing Europe’s Mismatch on Duration” we noted that our short positions in Italy (via the etf EWI) and the EUR (FXE) were working against us as three catalysts were giving a boost to European equity markets (especially the PIIGS) over the immediate term:

  1. Japan and China buying European debt
  2. Bullish speculation on a “comprehensive package” to tackle Europe’s sovereign debt crisis
  3. Hawkish commentary from ECB President Jean-Claude Trichet on inflation

In the note we also cautioned that over the intermediate term TREND our negative outlook on Europe, especially for the countries with high fiscal imbalances (Italy, Spain, and Portugal), remains intact.


These positions remain unchanged, and due to recent uprisings in Tunisia and Egypt European markets have received the proverbial hall pass on headline risk, and its equity markets, especially from the PIIGS, have outperformed. The threat now is significant mean reversion risk!


After all, the top 3 global equity indices year-to-date are:

  1. Greece Athex = +17.7%
  2. Italy FTSE MIB = +11.7%
  3. Spain IBEX 35 = +11.2%

Also, some of the fundamental data we follow to gauge the region’s “health” is showing signs of slowing, a concern over the intermediate term. We’ve hit on the pressing threat of inflation in our work, but forward looking indicators such as PMI surveys are signaling a topping, particular Germany, THE country “supporting” the region and divergent from Europe’s sovereign debt issues.


Final January PMI Manufacturing figures were released today from Markit (see chart). Although we’ll be more focused on the services numbers (released on Thursday 2/3), both Manufacturing and Services are indicating a slowing on the margin (despite the majority of countries reporting Manufacturing PMI improving month-over-month).  Importantly there’s a heavy line of resistance at 60 that Germany is bumping up against, and increasing the mean reversion risk.   


Europe Is Offside - mh1


Although a lagging indicator, unemployment rates across many nations, but in particular in Spain and Ireland are moving in the wrong direction. Germany remains the exception, falling 10bps month-over-month to 7.4% in DEC. Beware that austerity programs throughout Europe, which include job strikes, wage reductions and freezes, and consumer tax hikes could further bolster these figures.


Europe Is Offside - mh2


The EUR and ECB Catalyst


On Thursday (2/3) the ECB announces its refi rate. We do not expect a hike from the current 1.0% rate, despite Trichet’s recent hawkish rhetoric, which could pare back recent gains in the EUR-USD. We’d be shorting the currency (again) at its current level of $1.38 and covering it at $1.35 for a TRADE.


Matthew Hedrick


Europe Is Offside - mh3

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more

Europe's Battles Against Apple, Google, Innovation & Jobs

"“I am very concerned the E.U. maintains a battle against the American giants while doing everything possible to sustain so-called national champions," writes economist Daniel Lacalle. "Attacking innovation doesn’t create jobs.”

read more

An Open Letter to Pandora Management...

"Please stop leaking information to the press," writes Hedgeye Internet & Media analyst Hesham Shaaban. "You are getting in your own way, and blowing up your shareholders in the process."

read more