Chinese Thirst for Portuguese Debt, Go Figure

Positions in Europe: Long Germany (EWG)


The FT broke a story last night that the Chinese are interested in buying Portuguese bailout bonds from the AAA-rated European Financial Stability Facility (EFSF) rescue fund. The news, added a boost to the EUR-USD pair, marginally dipped Portuguese bond yields, and presents another turn in the headline risk surrounding the region’s sovereign debt contagion threats.


The news harkens back to this January when both China and Japan vocalized their support to buy European peripheral debt. You’ll remember that Norway’s sovereign fund also bought PIIGS paper early in the year, yet unlike China has not recently voiced interest in doubling down on the bet. The WSJ also reported last night that China bought a total of €1.1 billion of Portuguese bonds this year, which have seen a loss of at least 10%.


However, the news of China’s support for Portugal comes at a critical juncture following the country’s €78 billion bailout: in mid-June Portugal plans to raise €3-5 Billion in 10YR bonds (in its first auction following the bailout decision on May 3rd) and ~ €5 billion of 5YR debt at the end of June to meet nearly €10 billion in debt coming due in June. Clearly this handshake should encourage demand at future issuances, but at what yield premium? We wouldn’t put our necks on the line here as downside risk (including complete uncertainty surrounding Greece’s medium term state) remains significant.


Below we show a familiar chart of 10YR bonds from the periphery as a proxy for the risk trade. Notably, Ireland pushed above 11% day-over-day on the 10YR, and confirms that bailouts in and of themselves are not elixirs—we continue to press that the pain of the region’s sovereign debt contagion has a tail of 3-5 years as counties attempt to re-write years of fiscal imbalances.


Chinese Thirst for Portuguese Debt, Go Figure - a1


As the G8 Summit meets in northern France today, just this morning Eurogroup President Jean-Claude Juncker commented that the IMF may not release Greece’s tranche next month if an audit of its budget accounting shows that the country cannot guarantee financing for the next 12 months.  The EUR-USD largely shrugged off the "shock and awe" news, however, the CHF-EUR pair is on a tear, as the safety trade ramps up once again and strong trade data from Switzerland this morning:


Switzerland Trade Balance 1.52 B CHF APR vs 1.0 B CHF MAR

Switzerland Exports 7.9% APR M/M vs -3.1% MAR

Switzerland Imports 4.0% APR M/M  vs 1.8% MAR


Chinese Thirst for Portuguese Debt, Go Figure - a2


Our EUR-USD immediate-term TRADE range is tight = $1.39-1.43, with $1.41 being its new TREND line of resistance that is just broken. The USDX’s mild intraday up move is also propelling EUR-USD weakness. No doubt this is a volatile currency pair! Stay tuned.


Chinese Thirst for Portuguese Debt, Go Figure - a3


Matthew Hedrick


Cartoon of the Day: Hard-Headed Bears

How's this for "hard data"? So far, 107 of 497 S&P 500 companies have reported aggregate sales and earnings growth of 4.4% and 13.2% respectively.

read more

Premium insight

McCullough [Uncensored]: When People Say ‘Everyone is Bullish, That’s Bulls@#t’

“You wonder why the performance of the hedge fund indices is so horrendous,” says Hedgeye CEO Keith McCullough, “they’re all doing the same thing, after the market moves. You shouldn’t be paid for that.”

read more

SECTOR SPOTLIGHT Replay | Healthcare Analyst Tom Tobin Today at 2:30PM ET

Tune in to this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

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