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Positions in Europe: Long Germany (EWG); Short Spain (EWP)

In the chart below we present May European Manufacturing PMI figures according to Markit Economics. The May numbers show a major downward inflection from April, and confirm a negative trend over the last three months. We think declining factory production is largely in line with our Q2 Theme of Growth Slowing and Inflation Accelerating and consistent with eroding business and consumer sentiment and spending as headline risk surrounding peripheral sovereign debt contagion moves further to the forefront. With the EU-area the largest trading partner of most EU states, it comes as no great surprise that the majority of the countries are moving (downward) in tandem. [On the PMI survey, 50 is the line in the sand, with figures above 50 indicating expansion, and below indicating contraction. Spain is firmly in the latter camp.]

The Big Red: European Manufacturing PMI - zeechart

As we noted yesterday, statements from Eurogroup head Jean-Claude Juncker that a total restructuring of Greece’s debt is out of the question and that EU leaders will decide on a new aid package for Greece by the end of June may give some level of respite to European capital markets and the common currency in the near term. However, European equity markets are selling off today after a sizable rally yesterday, bond yields across the PIIGS are back up day-over-day, and a debt auction today from Portugal of €850 Billon of 3M bills yielded an elevated 4.967% (versus a previous auction of 4.625%).

As the high-frequency data slows, so too does our conviction. While Germany (via the etf EWG) has been a strong position for us in the Hedgeye Virtual Portfolio over the last two years, the data is slowing on the margin, and we’ll be managing our position accordingly.

Matthew Hedrick
Analyst