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Position: Long Germany (EWG); short Emerging Market (ESR)

Below we include a portion of a product offering from our Financials’ team, the Weekly Risk Monitor for Financials that tracks CDS across global banks. The table below covers major banks throughout Europe and the trend week-over-week was mostly wider, tightening for 15 of the 39 reference entities and widening for 24, particularly for Greek banks.

Risk Monitor: European Bank Swaps Widen - top1 

Risk Monitor: European Bank Swaps Widen - top2

The European credit markets continue to be an important indicator of risk for us. As the chart of 10YR government bond yields below presents (and in sharp contrast to the continued outperformance of the equity market of the PIIGS year-to-date) yields continue to trend higher, a reflection of the risk premium to own the debt and deficit imbalances of these nations.

Risk Monitor: European Bank Swaps Widen - top3

In the Hedgeye Virtual Portfolio we sold our long position in Sweden (EWD) today with the country immediate-term overbought. We’ll buy back the position on the next pullback. We continue to like the country’s growth profile; proactive rate adjustments to manage inflation (particularly housing related); and believe that the SEK will appreciate alongside rate hikes and as a safe haven versus the uncertainty with the EUR and USD.

We covered our EUR-USD position via the etf FXE on 2/25 with the ECB continuing to signal a more hawkish stance on inflation. We see the EUR-USD overbought for a TRADE (3 weeks or less) at $1.38 with support at $1.36.

We shorted more Emerging Market exposure today via the etf ESR as inflation crushes consumption's growth.

To keep on the calendar:

  • Wednesday (3/3) the EU announces methodology for its second round of bank stress tests
  • Thursday (3/4) the ECB announces its Refi rate decision

Matthew Hedrick