Positions in Europe: Long British Pound (FXB); Short Spain (EWP)
The week in Europe leads off with two leadership announcements: Spain’s PM Jose Zapatero said over the weekend that he will not seek a third four-year term with elections scheduled for March 2012 -- a not so surprising decision given his lack of popularity. And Guido Westerwelle, German Foreign Minister and head of Chancellor Merkel’s coalition partner the Free Democrats (FDP) resigned from his position as FDP party chair. We view Westerwelle’s move as a net positive for Merkel’s camp as his popularity has cratered since 2009 and more recently torn her coalition’s credibility - the outcome witnessed by the lack of support for Merkel’s CDU-FDP party in recent state elections.
The major headline data point today is Eurozone PPI at 6.6% in February Y/Y vs 5.9% in January.
Keith had this to say in our morning macro commentary:
“Interestingly, but not surprisingly, Inflation Accelerating in Europe has both expectations for an ECB rate hike this week (Thurs) and the Euro pushing higher. This is not good for debtors (another way to be long The Inflation), and I think this is most obviously expressed in Greek stocks. They are down a full -2.1% this morning but, more impressively, down -12.9% since a lot of the “reflation” mean reversion trades peaked on FEB 18th.
What goes up with Big Government’s help, can come down – and quickly.”
From our Risk Monitor we note no great changes in European CDS week-over-week, however the trend continues to rise for Greece, Ireland, and Portugal while falling for Spain and Italy. Our European Financial CDS Monitor showed that bank swaps in Europe were mostly tighter week-over-week, tightening for 30 of the 39 reference entities and widening for 9 (see charts below).
We think that the increased likelihood of the ECB to hike interest rates this Thursday (as Eurozone inflation jumps to 2.6% in March Y/Y) will put upward pressure on the EUR-USD this week.