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Today’s data around the horn.

Positions in Europe: Short EUR-USD (FXE); Short Italy (EWI); Short UK (EWU)


The numbers speak for themselves, but today’s initial August Manufacturing and Services PMI figures from the Eurozone, Germany, and France, show not only a slide versus July, but French and Eurozone Manufacturing fell below the 50 mark, indicating contraction, and Services held just above the mark for the Eurozone and Germany. This move however isn’t new—we indicated a downward inflection in the high frequency data from Germany beginning in March—and we expect more downside on the intermediate term as Europe fumbles with facilities/solutions to address sovereign debt contagion.   

European PMI Hits Sub-50 - a. pmi

ZEW Confidence

The current of declining sentiment was confirmed by today’s ZEW survey results. Germany’s Current Situation fell a monster 37 points to 53.5 AUG vs 90.6 JUL and the 6-month forward looking Economic Sentiment gauge dropped to -37.6 AUG vs -15.1 JUL, the lowest level since December 2008 and the biggest drop since July 2006. Eurozone Economic Sentiment also plunged, to -40 AUG vs -7 JUL.

European PMI Hits Sub-50 - a. zew


Swiss Miss

Over recent months we’ve discussed how strong Swiss exports figures defied the strength in the CHF versus the EUR and USD.  Swiss Export and Import data out today for the month of July showed a negative inflection of -3.0% month-over-month versus +3.8% in May. We’d expect a tail off in the months ahead from the currency impact (though perhaps a pop in August on easy comps) as the SNB struggles to make much of a dent in the value of the CHF versus major currencies since it indicated it would intervene on 8/10. Imports rose 0.1% in July M/M versus 1.0% in June, pushing the Trade Balance to 2.83B CHF in July.

Calendar Events

(8/24) France will unveil austerity measures that will include budget cuts and higher taxes on the highest income earners. HE: Could the terms arrest the threats on France’s AAA credit rating? Both government bond yields and sovereign CDS have moved higher in recent weeks.

(8/26) Spain is expected to unveil further austerity measures estimated to produce savings of 5B EUR. HE: The heat is on Spanish lending institutions and economic fundamentals remain bleak. More uncertainty may surround political transition as PM Jose Zapatero has called for early elections on  November 20th, four months early, and made clear that he will not seek a third term as Socialist Party head.  So long as the ECB’s SMP is buying Spanish bonds, yields should come in. This however, will not last in perpetuity.  Last week the ECB bought €14.3B vs €22B two weeks ago—two huge sums considering that before two weeks ago the SMP had only purchased €74B since May 2010.

(9/7) Germany’s constitutional court will hear cases against the constitutionality of the country’s previous bailout packages to Greece, Ireland, and Portugal. HE: While the German government insists that it has not broken any laws, and the case should be overturned, we’ll be watching for any tangential implications for the EFSF or European Stability Mechanism (beg. in 2013).

For more on our risk management outlook on Europe, see yesterday’s post titled “European Risk Monitor:  Summer’s Uncertainty”.

Matthew Hedrick

Senior Analyst