Trade Update: Shorting Spain (EWP)

Positions in Europe: Spain (EWP)


Keith shorted EWP in the Hedgeye Virtual Portfolio today with the IBEX 35 broken on its intermediate term TREND level and dancing on its immediate term TRADE line (see chart below).

 

 Trade Update: Shorting Spain (EWP) - 22. IBEX 35

 

We’re forecasting a long TAIL to Europe’s sovereign debt crisis. While Greece and Portugal are currently in the spotlight, we think Spain remains a much larger domino of risk on the near horizon. We think the news out today that the European Union is putting pressure on Spain to make additional budget cuts worth 0.5% of GDP will put further downward pressure on the broader Spanish index and dim an already fractured economy with weak confidence and sky-high unemployment (23% avg. and +50% for youth). Given this environment, we also think a social uprising is in the cards.  

 

Spanish PM Mariano Rajoy, elected in December of 2011, has inherited a budget that was fudged last year, with the previous budget deficit target at 6% of GDP for 2011 now estimated at 8.5%. This gap has thrown off the 2012 budget deficit reduction program, and the government unilaterally (ex-EU agreement) revised its 2012 deficit target to 5.8% versus the original 4.4% promise.  The EU says that’s not enough, and now the rub will be that further spending cuts will put additional downside pressure on the broader economy (fiscal multiplier) and tax receipts to pay down the deficit, which is targeted to be limited to 3% in 2013.

 

In typical political fashion, Rajoy will present his spending plans and additional austerity measures on March 30, days after regional elections in Andalusia, a Socialist stronghold that his People’s Party is attempting to win back.   

 

Matthew Hedrick

Senior Analyst


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