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Financial Repression

This note was originally published at 8am on April 02, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Such policies, known as financial repression, usually involve a strong connection between the government, central bank, and financial sector.”

-Carmen M. Reinhart

 

While Keynesian central planners continue to hope that they can suspend economic gravity, hope is not a risk management process. This morning’s economic data out of Europe continues to show you what Financial Repression looks like. Not good. Not going away.

 

The good news on this front is that it’s not different this time. Co-author of one of the most empirically damning books against Policies To Inflate through currency devaluation and/or sovereign debt pile-ups (This Time Is Different), Carmen Reinhart, wrote an excellent paper on March 11th that was, shockingly, not highlighted by The Ben Bernank in any of his daily Dollar Debauchery speeches last week.

 

Reinhart’s thesis, “Financial Repression Has Come Back To Stay”, is very similar to what we have called The Bernank Tax: “In the US, as in Europe, at present, this means consistent negative real interest rates (yielding less than the rate of inflation) that are equivalent to a tax on bondholders and, more generally, savers.”

 

Back to the Global Macro Grind

 

While the Fed Chairman remains laser-like focused on “laws” that are nothing more than social science stories (Okun’s Law), the rest of the world doesn’t seem so interested in his career risk management. People with real money in the game continue to search for the truth.

 

The truth is that the pace of Global Growth Slowing has picked up, sequentially, in the last month. While plenty a perma-bull was anchoring on 1 of the 2 China PMI prints released this weekend (1 beat, 1 missed – they were both probably made up), here’s the truth about PMI reports around the world in March versus February:

  1. USA 62 MAR vs 64 FEB
  2. China 53 MAR vs 51 FEB (or 48 MAR vs 50 FEB)
  3. India 54 MAR vs 56 FEB
  4. Germany 48 MAR vs 50 FEB
  5. France 47 MAR vs 50 FEB
  6. Spain 44.5 MAR vs 45 FEB

In other words, if you look at 47% of Global GDP (these 6 countries combined = approximately $29.5T in GDP), it’s slowing.

 

Now if you want to be the bull instead of being the perma Risk Manager on this top line matter, you might say ‘well hey, the UK PMI print for MAR was 52 versus 51.5 in FEB.’ And I’ll be the first to agree with you – it’s just a fact - as is Italy missing their PMI and printing a 10-year high in its unemployment rate of 9.3%.

 

Taking a step back, since Growth Slowing around this time last year didn’t wake up a lot of people until it was way too late, it’s important to reconcile why perma-bull pundits don’t get paid to see the obvious. It’s called anchoring – “a cognitive bias that describes the common human tendency to rely heavily, or “anchor”, on one piece of information when making decisions.” (Wikipedia)

 

Anchored: Washington and Old Wall Street based “economists” still think, for example, that US GDP is tracking “around 3%.” Why? Well, because the US GDP report for Q4 of 2011 was, uh, 3%!

 

You’ll find the complexion of the Q4 2011 US GDP report (C + I + G + (EX-IM)) interesting:

  1. GDP = +2.97% (up from 1.81% SAAR in Q311)
  2. Consumer Goods = +1.29% (up from +0.33% in Q311)
  3. Consumer Services = +0.19% (down from +0.9% in Q311)
  4. Fixed Investment = +0.78% (down from +1.52% in Q311)
  5. Inventories = +1.81% (up from 1.35% from Q311)
  6. Government = -0.84% (down from -0.02% in Q311)
  7. Exports = 0.37% (down from +0.64% in Q311)
  8. *Deflator = 0.84%

In other words, if the US Government uses a low enough “Deflator” (you subtract inflation from GDP to get the real (inflation adjusted) GDP number), it can pretty much tell you that US Economic Growth is whatever it wants it to be. In an election year, that’s just great.

 

But is this economy great? I think anyone who drives their own vehicle in it knows that inflation in cost of goods is running at least +300-500% higher than the GDP Deflator of 0.84% (so is the composite of US CPI and PPI).

 

Q: So, what happens to GDP when:

  1. The Nominal GDP growth rate declines sequentially like it just did (Q4 to Q1)
  2. The inflation rate rises sequentially like it just did (Q4 to Q1)

A: Real (inflation adjusted) Growth Slows.

 

Notwithstanding that Consumer Services slowing and Inventories rising in Q4 wasn’t a bad signal in and of itself in terms of Q4 “growth” mix, what you are seeing in Q1/Q2 of 2012 is the other side of Bernank’s War –it’s called Financial Repression.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, Japanese Yen (vs USD), and the SP500 are now $1636-1679, $121.94-124.13, $78.74-79.30, $82.44-84.03, and 1404-1416, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Financial Repression - Chart of the Day

 

Financial Repression - Virtual Portfolio


MONDAY MORNING RISK MONITOR: SPANISH SWAPS HIT ALL TIME HIGH & PULL GLOBAL BANK SWAPS HIGHER

Key Takeaways

* Spanish sovereign swaps continue to climb. At 502 bps this morning, they are up 102 bps from a month earlier and are up 38 bps vs. the prior week. Italian swaps stand at 435 bps, up 17 bps week over week and up 80 bps vs. a month earlier. For reference, Spanish swaps just hit an all time high as of this morning, narrowly eclipsing their highs of November last year (497 bps). Italian swaps are still a good bit below their prior highs.

 

* Both American and European Bank CDS were wider WoW. Bank swaps are reflecting the deterioration in creditworthiness in Spain, an economy roughly 5x as large as that of Greece. Get ready for 2011 all over again as we watch Spanish swaps climb and climb and concerns surrounding that rise escalate. 

 

* Euribor-OIS has ceased tightening. After steadily falling since the start of the year, the risk measure has essentially flattened out at the 40-41 bps level. This had been a key measure we were using to gauge the perceived risk in the counterparty system.

 

* High yield rates rose 4 bps last week underscoring increasing risk in the market. 

 

Financial Risk Monitor Summary  

• Short-term(WoW): Negative / 1 of 12 improved / 3 out of 12 worsened / 8 of 12 unchanged  

• Intermediate-term(WoW): Positive / 4 of 12 improved / 3 out of 12 worsened / 5 of 12 unchanged  

• Long-term(WoW): Neutral / 3 of 12 improved / 3 out of 12 worsened / 6 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: SPANISH SWAPS HIT ALL TIME HIGH & PULL GLOBAL BANK SWAPS HIGHER - Summary

 

1. US Financials CDS Monitor – Swaps widened for 26 of 27 major domestic financial company reference entities last week.   

Widened the most WoW: GNW, RDN, MTG

Tightened the most/widened the least WoW: MBI, AON, COF

Widened the most MoM: C, BAC, MS

Tightened the most/ widened the least MoM: MTG, MBI, AXP

 

MONDAY MORNING RISK MONITOR: SPANISH SWAPS HIT ALL TIME HIGH & PULL GLOBAL BANK SWAPS HIGHER - CDS 5

 

2. European Financials CDS Monitor – Bank swaps were wider in Europe last week for 37 of the 40 reference entities. The average widening was 5.6% and the median widening was 4.8%.

 

MONDAY MORNING RISK MONITOR: SPANISH SWAPS HIT ALL TIME HIGH & PULL GLOBAL BANK SWAPS HIGHER - cds 3

 

3. European Sovereign CDS – European Sovereign Swaps mostly widened over last week.  Spanish sovereign swaps widened by 8.1% (38 bps to 502).

 

MONDAY MORNING RISK MONITOR: SPANISH SWAPS HIT ALL TIME HIGH & PULL GLOBAL BANK SWAPS HIGHER - Sov 1

 

MONDAY MORNING RISK MONITOR: SPANISH SWAPS HIT ALL TIME HIGH & PULL GLOBAL BANK SWAPS HIGHER - Sov 2

 

4. High Yield (YTM) Monitor – High Yield rates rose 4 bps last week, ending the week at 7.37 versus 7.33 the prior week.

 

MONDAY MORNING RISK MONITOR: SPANISH SWAPS HIT ALL TIME HIGH & PULL GLOBAL BANK SWAPS HIGHER - High Yield

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 1.75 points last week, ending at 1650.

 

MONDAY MORNING RISK MONITOR: SPANISH SWAPS HIT ALL TIME HIGH & PULL GLOBAL BANK SWAPS HIGHER - LLI

 

6. TED Spread Monitor – The TED spread fell 1.6 basis points last week, ending the week at 38.2 bps this week versus last week’s print of 39.8.

 

MONDAY MORNING RISK MONITOR: SPANISH SWAPS HIT ALL TIME HIGH & PULL GLOBAL BANK SWAPS HIGHER - TED spread

 

7. Journal of Commerce Commodity Price Index – The JOC index was roughly flat WoW, ending the week at -8.7.

 

MONDAY MORNING RISK MONITOR: SPANISH SWAPS HIT ALL TIME HIGH & PULL GLOBAL BANK SWAPS HIGHER - JOC index 2

 

8. Euribor-OIS spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread was flat ending the week at 41 bps.

 

MONDAY MORNING RISK MONITOR: SPANISH SWAPS HIT ALL TIME HIGH & PULL GLOBAL BANK SWAPS HIGHER - Euribor OIS

 

9. ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  

 

MONDAY MORNING RISK MONITOR: SPANISH SWAPS HIT ALL TIME HIGH & PULL GLOBAL BANK SWAPS HIGHER - ECB liquidity

 

10. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 14-V1. Last week spreads widened , ending the week at 119 bps versus 118 bps the prior week.

 

MONDAY MORNING RISK MONITOR: SPANISH SWAPS HIT ALL TIME HIGH & PULL GLOBAL BANK SWAPS HIGHER - MCDX

 

11. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production. Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion. Last week the index rose 44 points, ending the week at 972 versus 928 the prior week.

 

MONDAY MORNING RISK MONITOR: SPANISH SWAPS HIT ALL TIME HIGH & PULL GLOBAL BANK SWAPS HIGHER - Baltic Dry

 

12. 2-10 Spread – We track the 2-10 spread as an indicator of bank margin pressure.  Last week the 2-10 spread tightened to 172 bps, 12 bps tighter than a week ago.

 

MONDAY MORNING RISK MONITOR: SPANISH SWAPS HIT ALL TIME HIGH & PULL GLOBAL BANK SWAPS HIGHER - 2 10 spread

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 2.0% upside to TRADE resistance and 1.9% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: SPANISH SWAPS HIT ALL TIME HIGH & PULL GLOBAL BANK SWAPS HIGHER - XLF 2

 

Margin Debt - February: +0.85 standard deviations 

We publish NYSE Margin Debt every month when it’s released. NYSE Margin debt hit its post-2007 peak in April of 2011 at $320.7 billion. The chart below shows the S&P 500 overlaid against NYSE margin debt going back to 1997. In this chart both the S&P 500 and margin debt have been inflation adjusted (back to 1990 dollar levels), and we’re showing margin debt levels in standard deviations relative to the mean covering the period 1. While this may sound complicated, the message is really quite simple. First, when margin debt gets to 1.5 standard deviations or greater, as it did last April, it has historically been a signal of extreme risk in the equity market - the last two times it did this the equity market lost half its value in the ensuing period. We flagged this for the first time back in May 2011. The second point is that margin debt trends tend to exhibit high degrees of autocorrelation. In other words, the last few months’ change in margin debt is the best predictor of the change we’ll see in the next few months. We would need to see it approach -0.5 to -1.0 standard deviations before the trend runs its course. There’s plenty of room for short/intermediate term reversals within this broader secular move. Overall, however, this setup represents a long-term headwind for the market. One limitation of this series is that it is reported on a lag.  

 

The chart shows data through February.

 

MONDAY MORNING RISK MONITOR: SPANISH SWAPS HIT ALL TIME HIGH & PULL GLOBAL BANK SWAPS HIGHER - Margin Debt

 

Joshua Steiner, CFA

 

Allison Kaptur

 

Robert Belsky

 

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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – April 16, 2012


As we look at today’s set up for the S&P 500, the range is 39 points or -1.55% downside to 1349 and 1.29% upside to 1388. 

                                            

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: on 4/13 NYSE -1577
    • Down from the prior day’s trading of 1933
  • VOLUME: on 4/13 NYSE 770.99
    • Increase versus prior day’s trading of 1.89%
  • VIX:  as of 4/13 was at 19.55
    • Increase  versus most recent day’s trading of 13.66%
    • Year-to-date decrease of -16.45%
  • SPX PUT/CALL RATIO: as of 04/13 closed at 1.98
    • Decrease from the day prior at 2.11 

CREDIT/ECONOMIC MARKET LOOK:


BOND YIELDS – 10yr UST yields snapping our intermediate-term TREND line of 2.03% last week is very bullish for Treasuries until it isn’t. This happened in conjunction with a spike in weekly jobless claims (380,000) = Growth Slowing. 

  • TED SPREAD: as of this morning 38
  • 3-MONTH T-BILL YIELD: as of this morning 0.08%
  • 10-Year: as of this morning 1.98
    • Unchanged from prior day’s trading of 1.98
  • YIELD CURVE: as of this morning 1.71
    • Decrease from prior day’s trading at 1.72 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: NOPA Monthly Oil, Soybean capacity
  • 8:30am: Empire Manufacturing, April, est. 18.00 (prior 20.21)
  • 8:30am, Retail Sales, March, est. 0.3% (prior 1.1%)
  • 9am: TIC Flows, Feb., est. total net $30b (prior $18.8b)
  • 10am: Business Inventories, Feb., est. 0.6% (prior 0.7%)
  • 10am: NAHB Housing Market Index, April, est. 28 (prior 28)
  • 11:30am: Treasury selling $30b 3-mo., $28b 6-mo.
  • 12:30pm: Fed’s Pianalto speaks in Lexington, Kentucky on banking, economy
  • 3:30pm: Fed’s Bullard speaks at Utah State University on the economy and monetary policy 

GOVERNMENT:

    • President Obama says accusations against Secret Service agents need thorough investigation
    • Senate holds test vote on “Buffett Rule” tax proposal
    • Arizona primary for Gabrielle Giffords’s congressional seat
    • U.S. House Oversight Committee Chairman Darrell Issa, R- Calif., holds hearing about “wasteful spending” by GSA, 1:30pm
    • U.S. Congress returns from two-week Easter recess
    • Supreme Court in session

 WHAT TO WATCH:

  • Retail sales may have gained 0.3% in March, economists est., indicating gasoline prices may have limited impact on spending
  • World Bank may select next president; U.S. nominee Jim Yong Kim favored after rival candidate Jose Antonio Ocampo withdrew
  • Goldman Sachs said to raise $2.5b selling ICBC shrs
  • Carlyle Group said seeking to raise up to $762.5m in IPO; prospectus may be filed as soon as today
  • China’s decision to double the scope of daily yuan moves may spur demand for renminbi bonds in Hong Kong
  • FCC seeks $25,000 fine from Google for not cooperating with probe into collection of personal data over wireless networks
  • Oracle, Google patent trial scheduled to begin today with jury selection; opening statements tomorrow
  • Hon Hai, Pegatron Get Apple iPad Mini Order, Commercial Times reports
  • Vestas Wind Systems jumped after a Danish newspaper reported two Chinese competitors are considering a possible bid
  • Anheuser-Busch InBev said to be nearing an agreement to gain control of Cerveceria Nacional Dominicana
  • GDF Suez agreed to buy 30% of International Power it doesn’t already own for $10b
  • Citigroup, JP Morgan, other banks release monthly credit- card data; Discover announced last week
  • IRS filing deadline for individual tax returns is Tuesday 

EARNINGS:

    • Mattel (MAT) 6 a.m., $0.07
    • M&T Bank (MTB) 7:51 a.m., $1.49
    • Citigroup (C) 8 a.m., $1.02
    • Gannett (GCI) 8:15 a.m., $0.31
    • Charles Schwab (SCHW) 8:45 a.m., $0.15
    • Lincare Holdings (LNCR) 4:30 p.m., $0.53
    • Brown & Brown (BRO) 4:54 p.m., $0.33
    • Equity Lifestyle Properties (ELS) 8 p.m., no est.

    

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)


COMMODITIES – getting blasted ever since the US Dollar stopped going down (2wks ago); got interconnectedness? We call this Deflating The Inflation, or unwinding Bernanke’s Bubbles (commodity bubble – see our slide deck). Gold and Copper down hard this morning after failing at $1675 and $3.73 levels of support last week – both are in Bearish Formations (bearish on all 3 of our risk management durations). 

  • Speculators Cut Wagers Most in 2012 as Growth Slows: Commodities
  • Commodity ‘Super Cycle’ May Be Coming to End, Citigroup Says
  • Corn, Wheat Drop on Slower China Growth, European Debt Concerns
  • Oil Declines a Second Day in New York After Iran Nuclear Talks
  • Gold Declines in London as Stronger Dollar Cuts Investor Demand
  • Sugar Falls to Three-Month Low on Brazil’s Crop; Coffee Declines
  • Copper Trades Little Changed at $7,980 a Ton; Aluminum Climbs
  • Mongolia Starts Share Sale Process for State-Owned Coal Company
  • Copper May Gain 20% on China Industrial Demand: Chart of the Day
  • Funds Cut Bullish Gasoline Bets as Prices Slide: Energy Markets
  • Conoco Fattest U.S. Dividend Offers 4% Income Not Growth: Energy
  • U.S. Auto Rebound Fuels 14% Great Lakes Cargo Increase: Freight
  • Japanese Utilities Use Record LNG Last Year on Idle Reactors
  • Speculators Cut Bets Most in 2012 on China
  • Commodities Extend Drop on European Crisis, Slower Asian Growth
  • Copper May Fall to $7,448 a Ton on Fibonacci: Technical Analysis
  • China to Overtake U.S. as Biggest Tanker User: Chart of the Day 

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 5

  

EUROPEAN MARKETS


EUROPE – the DAX is testing an intermediate-term TREND line breakdown of the 6614, so I’ll be watching that line closely as a barometer for what the correction in US stocks could look like (Germany’s jobs and fiscal situation is stronger than in the US); Spain and Italy look awful; we re-shorted France on Thursday as we think mean reversion there is to the downside.

 

THE HEDGEYE DAILY OUTLOOK - 6

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 8

 

 

 

The Hedgeye Macro Team

 

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.33%
  • SHORT SIGNALS 78.51%

THE M3: TABLES/SLOTS; S'PORE MARCH HOME SALES

The Macau Metro Monitor, April 16, 2012

 

 

NUMBER OF GAMING TABLES AND SLOT MACHINES IN 2007-2012 DICJ

Macau Q1 gaming tables ended at 5,242, down 60 tables QoQ, while slot machines increased by 46 machines QoQ to 16,102.

 

NEW HOME SALES REMAIN STRONG IN MARCH Channel News Asia

New home sales in Singapore remained strong in March.  A total of 3,032 units of new homes were sold in March, of which 2,393 were private homes while the rest were made up of executive condominiums.  The 2,393 units of private homes sold last month were marginally lower than the 2,413 units transacted in February.


THE WEEK AHEAD

The Economic Data calendar for the week of the 16th of April through the 20th is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.

 

THE WEEK AHEAD - 1


Weekly European Monitor: Shorting France and Buying Bunds

European Positions Update: Short France (EWQ); Long German Bunds (BUNL); Sold Germany (EWG) on 4/12

 

Asset Class Performance:

  • Equities:  The STOXX Europe 600 finished down -2.2% week-over-week vs -1.6% last week. Bottom performers: Italy -5.8%; Spain -5.4%; Finland -4.9%; Hungary -4.6%; France -3.8%; Denmark -3.0%. Top performers:  Cyprus +2.8%; Greece +0.8%; Russia (MICEX) +0.6%.  
  • FX:  The EUR/USD is down -0.18% week-over-week.  W/W Divergences: PLN/EUR -0.54%, SEK/EUR -0.39%, HUF/EUR -0.28%
  • Fixed Income:  Greek 10YR bond yields fell -107bps week-over-week, versus a gain of similar magnitude last week.  Most other countries were relatively flat week-over-week. Portugal led the charge +32bps to 12.55%, followed by Spain (+8bps) to 5.88%. Italy fell -7bps to 5.42%.

Weekly European Monitor: Shorting France and Buying Bunds - aa. yields

 

 

Portfolio: Short France (EWQ); Long German Bunds (BUNL)


Keith shorted France (EWQ) and bought German Bunds (BUNL) in the Hedgeye Virtual Portfolio yesterday (4/12). The moves are a continuation of our thinking about Europe: there’s a relative advantage to playing the capital markets of the stronger countries on the long side and weaker countries on the short side, at a price. We’re highly sensitive to price and well aware that there’s no simple equation to pair or hedge risk in Europe: political headline risk, even from the tiniest of countries in Europe, can roll country equity indices and influence yields across the continent.  And we don’t expect this trend to change. Namely, we expect Eurocrats to continue to behave in a reactive manner, with the next call likely being the re-engagement of the SMP, which has been dormant for the last four weeks. This program may help to reduce the recent spike in sovereign yields and rise in CDS, yet does little to address the larger box the Eurozone is trapped in. That said, we’ve yet to see a disruption in the tight trading band of the EUR/USD of $1.30 - $1.34. We recommend trading the range, until further notice.

 

The timing of our short France position also plays into Sunday’s first of two French presidential election votes and increased fear around the sovereign and banking risk of Spain. The incumbent Nicolas Sarkozy is favored to win the first vote versus Socialist candidate Francois Hollande; however Hollande is expected to win the deciding second vote 53% to 47% according to an Ifop-Fiducial poll published on April 6th.  What’s broadly clear is that both candidates plan to increase taxes and impose fees on financial transactions.  Both have declared to reduce the country’s deficit to 0% (as a % of GDP), Hollande by 2017 and Sarkozy by 2016.  Both guide to reduce the deficit to 3% by 2013 versus 5.3% in 2011.

 

However, Hollande has signaled an even more socialist agenda, which we think should result in the inability of the state to meet its deficit and debt reduction targets. Hollande wants to increase spending by €20 MM over five years (by repealing €29 MM of tax breaks and generating revenue by separating retail and investment bank operations and raising the income tax on earners over €1 MM to 75%) and reduce the retirement age to 60 from 62.  With the country’s debt rising to the 90% level, we expect growth to be compressed, as proven by the work of Reinhart and Rogoff.

 

Simply put, the CAC has run well ahead of peer indices and has room to revert. The CAC is at 0.9% year-to-date, while the Spanish IBEX is down -15.4% YTD.

 

Weekly European Monitor: Shorting France and Buying Bunds - aa. ewq

 

With respect to our position on German Bunds, we bought BUNL on a pullback, and continue to like Germany's employment and fiscal situation, which is much more tolerable than America’s right now and most of the Eurozone. Germany, across the capital markets, continues to signal a relatively safer bet.

 

Weekly European Monitor: Shorting France and Buying Bunds - aa. bunl


 

Call Outs:


SMP - European Central Bank Executive Board member Benoit Coeure suggested that the bank could revive its bond-purchase program to reduce Spain’s borrowing costs: “We have an instrument, the securities markets program, which hasn’t been used recently but it still exists.”

 

Spain - borrowed €227.6B from the ECB in March, up €75B versus February, the same amount Italy borrowed in March.

 

Portugal - Dependence of the Portuguese banking system on the ECB rose to a record high in March, as banks took advantage of easier borrowing conditions: Bank of Portugal said domestic banks' use of the ECB's various credit facilities rose to €56.32 billion in March from €47.55 billion in February.

 

Switzerland - “The Swiss National Bank is enforcing the minimum exchange rate with all the means at its disposal,” SNB President Thomas Jordan told reporters at a press briefing today. “We are prepared to buy foreign currency in unlimited quantities for this purpose. In this respect, our policies are totally unchanged.”

 

Italy – Bond auction come in with higher yields. The bank sold €8.0B in 12-month bills with an average yield of 2.840% vs 2.392% prior; and €2.884 billion of 3YR bonds vs a €3 billion max target with a yield of 3.89% vs 2.76% previously.

 

EUR/USD - Most-accurate foreign-exchange forecasters say the euro will slide as austerity-driven spending cuts from Spain to Italy reignite debt turmoil and drag the region into recession

  • Nick Bennenbroek, head of currency strategy at Wells Fargo & Co., expects the euro to drop more than 5% to $1.24 at the end of 2012.
  • Westpac Banking Corp., which had the second-lowest margin of error, predicts $1.26.

 

 

CDS Risk Monitor:

 

Week-over-week Spain saw the largest gains in CDS, +12bps to 487bps, while the other countries we follow were relatively flat.  Ireland flashed an inflection, down -16bps to 589bps. 

 

Weekly European Monitor: Shorting France and Buying Bunds - aa. cds   a

 

Weekly European Monitor: Shorting France and Buying Bunds - aa. cds   b

 


Data Dump:


Eurozone Industrial Production -1.8% FEB Y/Y vs -1.7% JAN

Eurozone Sentix Investor Confidence -14.7 APR (exp. -9.1) vs -8.2 MAR

 

Germany CPI 2.3% MAR Y/Y vs 2.5% FEB

Germany Exports 1.6% FEB M/M (exp. -1.2%) vs 3.4% JAN

Germany Imports 3.9% FEB M/M (exp. 1.3%) vs 2.4% JAN

Germany Wholesale Price Index 2.2% MAR Y/Y vs 2.6% FEB   [0.9% MAR M/M vs 1% FEB]

 

UK PPI Input 1.9% MAR M/M (exp. 1.4%) vs 2.5% FEB   [5.8% MAR Y/Y (exp. 4.8%) vs 7.8% FEB]

UK PPI Output 0.6% MAR M/M  (exp. 0.5%) vs 0.6% FEB    [3.6% MAR Y/Y (exp. 3.5%) vs 4.1% FEB]

 

France Bank France Business Sentiment 95 MAR vs 95 FEB

France Industrial Production -1.9% FEB Y/Y (exp. -1.2%) vs -1.9% JAN

France Manufacturing Production -3.7% FEB Y/Y (exp. -1.7%) vs -1.7% JAN

France CPI 2.6% MAR Y/Y vs 2.5% FEB

Italy Industrial Production -3.5% FEB Y/Y vs -1.7% JAN

 

Spain House Transactions -31.8% FEB Y/Y vs -26.3% JAN

Spain Industrial Output -3% FEB Y/Y vs -2.5% JAN

Spain CPI 1.8% MAR Y/Y vs 1.9% FEB

 

Sweden Industrial Production -7.1% FEB Y/Y vs 1.7% JAN

Sweden CPI  1.5% MAR Y/Y vs 1.9% FEB

Switzerland Unemployment Rate 3.1% MAR (UNCH)

 

Norway Industrial Production 3.1% FEB Y/Y vs 3% JAN

Ireland Consumer Confidence 60.6 MAR vs 57 FEB

Ireland CPI 2.2% MAR Y/Y vs 2.1% FEB

Ireland Industrial Production -3% FEB Y/Y (exp. -0.5%0 vs -0.2% JAN

Finland CPI 2.9% MAR Y/Y vs 3.1% FEB

 

Greece Industrial Production -8.3% FEB Y/Y vs -5% JAN

Greece CPI 1.7% MAR Y/Y vs 2.1% FEB

Greece Unemployment Rate 21.8% JAN vs 21% DEC

 

Portugal Industrial Sales 0.7% FEB Y/Y vs 2.9% JAN

Portugal Construction Works Index 61.4 FEB vs 63.2 JAN

Portugal CPI 3.1% MAR Y/Y vs 3.6% FEB

 

Russia Light Vehicle and Car Sales 13% MAR Y/Y vs 25% FEB

Turkey Industrial Production 4.4% FEB Y/Y (NSA) vs 1.5% JAN

Hungary Consumer Prices 5.5% MAR Y/Y vs 5.9% FEB

Hungary Industrial Production -3.4% FEB Y/Y vs -2.7% JAN

 


Interest Rate Decisions:


(4/9) Russia - Bank Rossii left the refinancing rate UNCH at 8.00%; overnight auction-based repurchase rate UNCH at 5.25%; and the overnight deposit rate UNCH at 4.00%.

 

(4/12) Serbia Interest Rate UNCH at 9.50%

 

 

The European Week Ahead:


Sunday: Apr. UK Rightmove House Prices

 

Monday: Feb. Eurozone Trade Balance; Moody's Completes Review of 24 Italian Bank Ratings (Decision on Apr 20); Feb. Italy Trade Balance, General Government Debt

 

Tuesday: Apr. Eurozone Zew Survey Economic Sentiment; Mar. Eurozone New Car Registrations, CPI; Apr. Germany Zew Survey Current Situation and Economic Sentiment; Mar. UK CPI, RPI; Feb. UK House Prices; Feb. Italy Current Account

 

Wednesday: Feb. Eurozone Current Account, Construction Output; UK BoE Minutes; Mar. UK Claimant Count Rate, Jobless Claims Change; Feb. UK Avg Weekly Earnings, ILO Unemployment Rate; 1Q Spain House Price Index; Feb. Spain Trade Balance; Sweden Riksbank Interest Rate

 

Thursday: Group Meeting of 20 Deputy Finance Ministers (Apr 19-22); Apr. Eurozone Consumer Confidence – Advance; Feb. Italy Industrial Orders and Sales; Feb. Greece Current Account

 

Friday: Annual Spring Meeting of the IMF/World Bank (Apr 20-22); Mar. Germany Producer Prices, IFO Business Climate, Current Assessment, and Expectations; Mar. UK Retail Sales

 

Sunday: First round of the French Presidential Election

 

 

Extended Calendar Call-Outs:


22 April:  French Elections (Round 1) begins, to conclude in May.

 

29 April, 6 or 13 May:  Potential Greek Presidential Elections.

 

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.

 

 

Matthew Hedrick

Senior Analyst


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