European Risk Monitor: Ouch!

Positions in Europe: Long Germany (EWG); Long Sweden (EWD)

Geopolitical risk is back, or did it ever leave? As we look back at last week’s market performance in Europe little has changed regarding the region’s sovereign debt soap opera. The incremental news, including Moody’s downgrade of Portuguese credit rating four notches to junk (Ba2) on Wednesday, contributed significantly to the strong underperformance from the peripheral capital markets, while the spotlight on fiscal imbalances appears to jump from one nation to the next. Of the equity markets, Italy’s FTSE was the worst performer across the region, down -7.2% last week on a week-over-week basis, followed by Spain’s IBEX (-5.3%), and Greece’s Athex (-4.4%).


Our risk metrics of bond yields and CDS spreads continue to trend up and to the right, reflecting that little has been done to address the solvency issues of the PIIGS. We’ve named the bailout packages for the PIIGS mere ‘band-aids’ for they’re just that—short term fixes to much larger fiscal imbalances. Repairing years of government overspending, oversized government sectors, and a lack of tax collection on a backdrop of weak growth prospects and under the rigid constraints of the ECB’s unilateral monetary policy, change in the fiscal standing of the PIIGS will not happen overnight—yet investor patience is short and the actions of the main ratings agencies are impactful. Expect more foot power (riots and demonstrations) on the ground. The nearest major catalyst is a mid-September date to finalize a second bailout package for Greece (est. €70-120 Billion).


European Risk Monitor: Ouch! - me.1


European Risk Monitor: Ouch! - me2


As headlines sway markets, “new risks” have surfaced from Italy. We’ve long since warned of elevated debt and deficit levels of Italy and Spain, two economies that make Greece, Portugal, and Ireland, even when combined, look like small fries, with exponentially more banking counterparty exposure to the rest of Europe.  News out today that Italian regulators are ordering a new short-selling rule on Italian-listed securities until September 9th, not only sent banking stocks across the region plummeting [in some cases halting the stock (Unicredit)], but took down entire indices as well. Italy’s FTSE  had its largest one-day drop in more than a year!  Helping the tumble was talk about Italy’s public debt—the second highest in the Eurozone behind Greece’s—at 119% of GDP at a meeting of Eurozone finance ministers today in Brussels as Italy’s parliament still needs to finalize a new three year austerity program worth €47 billion in tax hikes and spending cuts next month.


While Eurozone leaders, including Chancellor Merkel, voiced confidence in Italy’s ability to pass austerity and trim its debt, it was nevertheless a bloody Monday, with neither the equity, debt or currency markets un-phased. The worst equity performers day-over-day included:


Portugal (-4.3%)

Italy (-4.05%)

Spain (-2.7%)

France (-2.7%)

Greece (-2.6%)


The EUR-USD, which has largely held up in the $1.40 to $1.45 range over the last weeks, touched $1.39 intraday today (the first time since late May) and is trading at  $1.4022, or down  -1.70%. The EUR-USD is now squarely through our intermediate term TREND line of $1.43, an ominous signal that we’ll be looking for confirmation of before issuing a new target.  We continue to maintain that Troika’s mandate to step in to bailout any Eurozone member will help support the EUR-USD, but not in perpetuity.


All-Time is a Long Time!

With yields continuing to blow out across the periphery, our focus is on Spain and Italy, both of which flashed all-time highs in spreads over German bunds today. This ominous signal was countered by the relative safety trade in the Swiss Franc, a haven as Europe works through its issues. The CHF-EUR reached its own all-time high at 0.8539 EUR today!


European Risk Monitor: Ouch! - me3



Banking Risks Pop

Ahead of this Wednesday’s (7/13) announcement of the European Bank Stress Tests, Part II, and with respect to Italy’s move on short sales today, risk blew out significantly week-over-week. Our European Financials CDS Monitor showed that 32 of the 38 bank swaps were wider week-over-week, and 7 were tighter, and one unchanged.  Should the estimated 15-22 of 95 banks fail the test, expect more downside ahead!


European Risk Monitor: Ouch! - me4




We remain very cautious on owning European countries on the long or short sides. To the latter, we think there’s more downside from here for the capital markets of the periphery. We remain long Germany (via the etf EWG) in the Hedgeye Virtual Portfolio and added Sweden (EWD) on the long side on 7/8. 


Matthew Hedrick


7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more

Got Process? Zero Hedge Sells Fear, Not Truth

Fear sells. Always has. Look no further than Zero Hedge.

read more