Positions in Europe: Short UK (EWU); Short EUR-USD (FXE); Short Italy (EWI); Sold Germany today
Germany Confidence Dips, Selling EWG
German expectations of economic growth over the next 6 months according to ZEW declined for the 5th straight month to -15.1 in July versus -9 in June, its lowest level since January 2009 (see chart below). While but one sentiment indicator, it confirms with high frequency data that has slowed in Germany in recent months, which prompted us to sell our long Germany position via the etf EWG in the Hedgeye Portfolio today.
According to GfK, another sentiment survey provider, German consumer sentiment will rise for the first time in four months in July, citing that “Good general conditions” have become “more influential than detrimental factors, such as the state of affairs in Greece.” We’re however not convinced.
While the intermediate term TREND line in the DAX has held up above the 7,100 line, it danced dangerously around this level for most of June and recently pulling back squarely to the line (see chart below). We think that despite Germany’s strong fiscal position and leadership in the debate on solutions to the region’s peripheral ails, it is not immune to broader contagion.
UK’s Sticky Stagflation, Shorting EWU
UK CPI has held at or above the 4% for the last 5 months, currently at 4.2% in June year-over-year, with no indication that the BoE will move off its 0.50% benchmark interest rate to quell it. We’ll take the other side of BoE Governor King who expects CPI to return to the target of 2% over the intermediate term. With inflation pushing at these elevated levels and growth prospects anemic, we’re bearish on the UK’s sticky stagflation. Below we show a chart of the FTSE, which is clearly broken below our intermediate term TREND line at 5,926.
IBEX and MIB Level to Watch
Spain’s IBEX at the 9,984 resistance line, down -15.0% since 2/17
Italy’s MIB at the 19,559 resistance line, down -21.1% since 2/17
-For both indices we’d initiate short positions provided the resistance TREND lines were not violated to the upside.
Italy’s Spotlight Day-over-Day, Short EWI
Day-over-day we’re seeing a reduction in risk in Italy. The 10YR government bond yield came in 26bps to 5.73%, after flirting around the 6% level in the last days, a level proven to be a significant breakout level for yields in Greece, Ireland, and Portugal in the past. Equally, Italian 5YR CDS spread dropped 17bps d/d to 302bps today.
We’d caution that this is but one day of improvement. Spain’s bond auction of 12 and 18 month bills today showed a significant boost in yields to entice investors, with the 12M pegged at 3.7% versus 2.7% in a similar auction in June and the 18M pushing 3.9% versus 3.3% in June. We’d expect a similar trend of higher yields to continue for the rest of the periphery over the intermediate term.
Calendar Events
The next calendar catalyst to watch is the upcoming EU Summit, scheduled for this Thursday, however speculated to be pushed to tomorrow. The main agenda is to address a new rescue plan for Greece, pegged around €115 Billion. Over the weekend Germany Chancellor Angela Merkel told the FT that she will only attend “if there is going to be an agreement on a new rescue plan for Greece”, a marked inflection from recent discourse suggesting a plan would come in mid-September. Merkel said “she wished to avoid any Greek debt rescheduling, but underlined that the key to a deal would be substantial voluntary involvement of private creditors in easing the Greek debt burden.”
While it’s anyone’s guess what may come out of the meeting given the competing ideologies and politicking, the fire was further stoked today with comments from Austria’s Central Banker and ECB Governing Council member Ewald Nowotny who said there’s “a full range of options and definitions, from a clear-cut default, selective default, credit event and so on.”
The meeting will be front and center on our screens including how it relates to the EUR-USD, which we’re short in the Hedgeye Portfolio via the etf FXE. Our immediate term TRADE levels are $1.39 to $1.41 and the intermediate term TREND is decidedly broken at $1.43. This is THE key trade our team is watching!
Matthew Hedrick
Analyst
