Positions in Europe: Short EUR/USD (FXE)
Asset Class Performance:
- Equities: European indices were mixed week-over-week (after 3 straight weeks of gains across most of the region), with a positive divergence from the western periphery. Top performers: Estonia 5.6%; Greece 4.6%; Portugal 2.4%; Norway 2.1%; and the Denmark 1.1%. Bottom performers: Hungary -3.2%; Belgium -3.2%; Russia (MICEX) -2.4%; Netherlands -1.9%; Czech Republic -1.9%.
- FX: The EUR/USD gained +0.07% week-over-week. Divergences: RUB/EUR +0.40%, HUF/EUR -1.26%, PLN/EUR -1.30%. YTD the HUF has made the largest gains (among European currencies) against the EUR at +6.95%.
- Fixed Income: 10YR sovereign yields broadly decreased across the periphery w/w. Greece led the move, falling -118bps to 32.91% followed by Portugal (-133bps) to 12.97%. Spain increased 31bps to 5.25% and Germany gained 13bps to 1.97%.
It was another manic week with attention directed at Greece. But as Keith noted in today’s Early Look, Greece is but a tree within a forest of globally interconnected risks. Our note on 2/8 titled “Greek PSI Is NOT Getting Done” proved to be apt—Eurogroup Ministers withheld approval on a Greek bailout on Thursday (2/9) evening, citing that the country must come up with €325 million in additional cuts to this year’s budget, therein delaying a decision for yet another week. Here’s a “new” Greek timeline:
Sunday (2/12) – Greek government to identify €325 million of additional cuts to this year’s budget and get it through a Parliament vote on Sunday, along with a signed memorandum that will hold them to their commitments.
Wednesday (2/15) - Once this is done, the Finance Ministers will meet again and potentially sign off on the deal, although Jean-Claude Juncker says there are no guarantees a final decision will be made then.
Tuesday (3/20) - Greece’s €14.5 billion Bond Redemption due.
As we noted in our post “Greek PSI Is NOT Getting Done”, even if the Eurogroup approve the bailout terms, individual parliaments may call the issue to vote. For example, the German Bundestag plans to vote on the issue on February 27th, all of which suggests a final decision on PSI and a bailout could drift towards an 11th hour decision ahead of the country’s €14.5 billion bond due on March 20th.
We’re of the opinion that Eurocrats, led by the voice of Chancellor Merkel, want to work with Greece to preserve the union. For one, we think a weak EUR/USD is in the interest of Germany and Greece is an important export market. Secondly, our read on Eurocrats remains that they fear the domino effect: despite talk of ring-fencing Greece, they overwhelmingly fear far larger countries defaulting or leaving the union as a result of a Greece exit and therefore see it as a risk not worth taking.
In our note on 2/9 titled “Tight-Lipped Draghi Goes Further Non-Standard” we discussed the marginal changes to the ECB’s growth outlook, namely to “tentative signs of stabilization in economic activity at a low level” versus “substantial downside risks”, and additional collateral changes (for more see the note). Additionally, the BOE met this week and kept rates UNCH but added £50 billion additional QE (in line with consensus) in response to very negative growth prospects.
- Portugal - Fitch says Portugal faces a very serious recession this year, but will not need another bailout.
- China - may provide an investment to Europe (likely EFSF) of as much as €100 billion, said Yuan Gangming, an economist at the Chinese Academy of Social Sciences.
- Russia - Putin may dissolve his ruling party and create a new power base after next month’s presidential vote.
- Germany - Merkel’s ruling Christian Democrats rose 2 percentage points to 38%, the highest approval rating since August 2009, in the weekly Forsa poll. The Free Democrats, Merkel’s junior coalition partner, were stuck at 3% and the Social Democrats, the main opposition party, were unchanged at 27%.
- Switzerland - SNB reiterated a warning that the Central Bank will intervene heavily at any time if needed to defend a cap on the value of the Swiss franc versus the euro and stated that it won’t allow the euro to trade below 1.20 francs.
- Vodafone - missed quarterly revenue forecasts, with increasingly tough trading in Spain and Italy overshadowing solid performances in emerging markets and northern Europe.
Key Regional Data This Week:
Eurozone Sentix Investor Confidence -11.1 FEB vs -21.1 JAN
Russia CPI 4.2% JAN Y/Y (exp. 4.3%) vs 6.1% DEC
Germany Exports -4.3% DEC M/M (exp. -1%) vs 2.6% NOV
Germany Industrial Production 0.9% DEC Y/Y (exp. +4.3%) vs 4.4% NOV
Germany Factory Orders 0.0% JAN Y/Y (exp. -0.4%) vs -4.3% DEC
UK Industrial Production -3.3% DEC Y/Y (exp. -3.1%) vs -3.6% NOV
Greece Unemployment Rate 20.9% NOV Y/Y vs 18.2% OCT
Greece Industrial Production -11.3% DEC Y/Y vs -7.8% NOV
(2/8) Iceland Sedlabanki Interest Rate UNCH at 4.75%
(2/9) BOE keeps rates UNCH at 0.50%. The BOE adds 50B GBP in asset purchases/QE (as expected) to take the program to 325B GBP
(2/9) ECB keeps rates UNCH at 1.00%
CDS Risk Monitor:
On a w/w basis, CDS was largely down across European sovereigns, with Portugal leading the charge down for a second straight week, at -179bps to 1,154bps. Ireland saw the next largest drop at -18bps to 565bps (see charts below).
Keith shorted the EUR/USD via the eft FXE on 1/19 in the Hedgeye Virtual Portfolio and re-shorted the pair on 2/8 with the price bumping up against our immediate term TRADE resistance level of $1.32. We continue to think that the uncertainty around shoring up Greek PSI and bailout deals will drive this pair lower.
The European Week Ahead:
Sunday: The Greek government is to identify €325 million of additional cuts to this year’s budget and get it through a Parliamentary vote on Sunday, along with a signed memorandum that will hold them to their commitments.
Monday: Jan. Germany Wholesale Price Index (Feb 13-14); Jan. UK Consumer Confidence (Feb 13-17) and RICS Home Price Balance
Tuesday: Feb. Eurozone Zew Survey Economic Sentiment; Dec. Eurozone Industrial Production; Feb. Germany ZEW Survey Economic Sentiment and Current Situation; Jan. UK CPI and Retail Price Index; Dec. UK House Prices; Q4 France Non-Farm Payrolls and Wages – Preliminary; Q4 Greece GDP - Preliminary
Wednesday: (Tentatively) Eurozone Finance Ministers will meet and sign off on the Greek bailout should it pass the Greek Parliamentary vote on Sunday. Q4 Eurozone and Germany GDP – Advance; Dec. Eurozone Trade Balance; UK BoE Inflation Report; Jan. UK Jobless Claims Change and Claimant Count Rate; Dec. UK Unemployment Rate; Q4 France GDP – Preliminary; Jan. Russia Industrial Production (Feb 15-16); Q4 Italy GDP – Preliminary
Thursday: Eurozone ECB Publishes Feb. Monthly Report; Jan. Eurozone New Car Registrations; Jan. Russia Real Wages and Unemployment Rate (Feb 16-20); Q4 Spain GDP – Preliminary; Sweden Riksbank Interest Rate Announcement
Friday: Dec. Eurozone Current Account and Construction Output; Jan. Germany Producer Prices; Jan. UK Retail Sales
Extended Calendar Call-Outs:
29 February: 2nd 36-Month LTRO Allotment
25-26 February: G20 Finance Ministers Meeting in Mexico City. Decision on IMF loan of €500B expected.
29 February: Eurogroup Meeting to sign the endorsed agreement between the 17 on the Treaty for the European Stability Mechanism.
1-2 March: Signing of the Fiscal Compact by 17 Eurozone leaders together with the non-euro area leaders of countries willing to join. Further the group will reassess the adequacy of resources under the
EFSF and ESM rescue funds.
30 June: Deadline for EU Banks to meet €106 billion capital target/the 9% Tier 1 capital ratio.
1 July: ESM to come into force.