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.
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
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.