European Positions Update: Long German Bunds (BUNL)
Asset Class Performance:
- Equities: The STOXX Europe 600 closed up +0.52 week-over-week vs +1.7% last week. Top performers: Hungary +4.1%; Finland +2.7%; Italy +2.6%; France +2.4%; Austria +2.4%; Spain +1.5%. Bottom performers: Slovakia -4.2%; Greece -2.6%; Russia (MICEX) -2.3%; Switzerland -1.9%; Denmark -1.8%.
- FX: The EUR/USD is up +0.26% week-over-week. W/W Divergences: HUF/EUR +3.52%, TRY/EUR +1.49%, GBP/EUR +62%; SEK/EUR -0.78%, NOK/EUR -0.44%.
- Fixed Income: Portugal’s 10YR government bond yield saw the biggest decline of -131bps to 10.60% week-over-week. Did anything about Portugal’s fiscal risk profile change over the week? --NO! Greek yields fell -41bps to 20.96%. Most other country yields we track were relatively flat on a week-over-week basis.
In Review:
The governments of Holland, Romania, and possibly the Czech Republic fell this week. Upps?!
Wrapping a bow around what is going on in Europe from the perspective of a united voice on the Eurozone’s sovereign and banking crisis to the impact of individual country government turnover is no easy task. Why? Because there’s no such thing as a united voice across Europe and while citizens (and non-majority ruling government coalitions) have the best intentions in voting down their elected leaders, “fixing” Europe may be not only a question of said leadership, but the compromised and constrained nature of an uneven monetary union. In any case, what’s clear is that Greece was not the only country guilty of fiscal excesses across Europe, that it’s no longer just the streets of Greece that are filled with rioters, and it’s no longer just Greek governments that are being toppled.
Righting the Ship: Damned if you do, Damned if you don’t
Fiscal compact? Growth compact? Compromised Compact? This week saw a continuation of the newly developing inflection in rhetoric on the region’s sovereign and banking imbalances: a shift in tone from outright budget consolidation to the worry of the impact to growth from such a policy. However, the size, shape, or funding of a “Growth Pact”, which was first uttered by ECB President Mario Draghi, but does not include the endorsement of the ECB’s balance sheet, is unclear.
Just on Wednesday the European Commission called for a 6.8% budget increase for member states in 2013, a gesture of solidarity towards crisis-hit countries, however its passage appears unlikely after firm opposition from Germany, France, and the UK.
The existing rub in directing Europe is also centered around the politically compromised nature of Europe’s leadership: on one hand they have to answer to their citizenry that is largely voting against fiscal consolidation, yet on the other they must answer to the market, and associated cost (issuing debt) and growth pressures, if deficit and debts are not curbed through austerity. These factors are then compounded given deep structural drags, like high unemployment rates, low labor productivity, vulnerable banks, and further declines in housing and property prices ahead. Just today Spain reported an unemployment rate of 24.4% for Q1 and 52% for Spanish youths. As our DOR Daryl Jones said this morning: a generation of unemployed is not a positive leading indicator for the outlook of any nation or region.
This week we heard a few loud voices on the topic. One came from Francois Hollande, France’s presidential candidate for an election vote next Sunday (May 6), who said he’d immediately call for a Growth Pack if he wins. As a reminder, Hollande rejects the fiscal compact, supports the issuance of eurobonds to finance infrastructure, industrial investment and employment; additional financing for the EIB; the implementation of a financial transactions tax that will help fund development projects; and the more efficient use of EU structural or regional development funds.
The other strong and opposing voice came from Bundesbank President Jens Weidmann, who said that while he also did not back down from his assertion that some of the of the ECB's emergency measures, including bond buying and easier collateral rules, threaten financial stability and could generate inflation. Weidmann said further:
“Monetary policy is not a panacea and central bank firepower is not unlimited, especially not in a monetary union… We can only win back confidence if we bring down excessive deficits and boost competitiveness. And it is precisely because these things are unpopular that makes it so tempting for politicians to rely instead on monetary accommodation.”
So where does Europe shake out from here? While the specific policy moves are uncertain, it appears increasingly more likely that Europe’s stronger nations will subsidize the weaker ones because politically compromised Eurocrats would rather save their own jobs than deal with the consequences of losing a party seat or answering to the question of letting a country default and/or exit the Eurozone. Further, a win by Hollande on May 6thcould well spell France becoming an island state, without the strong working relationship with Germany’s Merkel, which could create a very divided voice on Europe’s go-forward strategy to assess its sovereign and banking issues.
Switching gears, the broader data released in Europe this week (below under the section “Data Dump”), continues to show weakness in month-over-month readings in concurrent-to-forward-looking data. PMIs (Services and Manufacturing) for the Eurozone remain comfortably below the 50 line that marks contraction and fell from MAR and APR and five Eurozone Confidence figures slowed M/M. German data continues to show a bright spot (CPI came in 10bps to 2.2% in APR Y/Y and Services PMI rose to 52.6 in APR vs 52.1 MAR) however we’re not ruling out a slowing in Germany in the 2H due to underperforming economic expectations across the region.
Call Outs:
Holland: Dutch PM Mark Rutte's government fell Monday after 1.5 years in power because it failed to win support for the budget bill from the populist Freedom Party, whose support was required to push laws through parliament. However, on Thursday the caretaker government received the vote of three left-leaning opposition parties to get an austerity package passed to ensure the government is on track to reduce its deficit from an estimated 4.5% of GDP this year to 3% next year. The measures include an increase in the sales tax to 21% from 19%, health-care cuts, and a pay freeze for civil servants. Savings will be at least €11 billion ($14.6 billion), according to figures provided by the government.
Romania: the government collapsed Friday after a censure motion filed by the opposition won approval in Parliament, the second time this year a Romanian government has crashed. It is unclear if president Traian Basescu will name a PM and/or if a new coalition will be quickly formed, or if an independent government will exist for the next six months until parliamentary elections are held.
Hungary: Hungary's government promised Monday to impose new taxes and make deep spending cuts this year and next, as it tries to persuade the EU—and jittery debt markets—that it can meet fiscal targets despite slowing economic growth.
France: Socialist presidential candidate Francois Hollande pledged to block corporate job cuts in France that may start soon after the May 6th vote. He said on France channel 2 television that he will not allow a wave of firings stemming from restructuring programs that some have postponed until after the election, adding that there needs to be a sense of responsibility among corporate executives.
CDS Risk Monitor:
Week-over-week CDS was largely down across the main countries we track. Portugal saw the largest decline in CDS w/w, -107bps to 995bps, followed by Spain -26bps to 478bps, Italy -24bps to 452bps, and Ireland -11bps to 579bps. French risk is rising alongside an increased likelihood that the Socialist Hollande wins the presidency on May 6th, with 5YR CDS up 13% in the last month.
Data Dump:
Eurozone PMI Manufacturing 46 Prelim APR (exp. 48.1) vs 47.7 MAR
Eurozone PMI Services 47.9 Prelim APR (exp. 49.3) vs 49.2 MAR
Eurozone PMI Composite 47.4 APR (exp. 49.3) vs 49.1 MAR
Eurozone Govt debt as % GDP 87.2% in 2011 Y/Y
Eurozone Business Climate Indicator -0.52 APR (exp. -0.30) vs -0.28 MAR
Eurozone Consumer Confidence -19.9 APR vs -19.1 MAR
Eurozone Economic Confidence 92.8 APR (exp. 94.2) vs 94.5 MAR
Eurozone Industrial Confidence -9 APR (exp. -7) vs -7.1 MAR
Eurozone Services Confidence -2.4 APR (exp. -0.5) vs -0.3 MAR
Germany PMI Manufacturing 46.3 Prelim APR (exp. 49) vs 48.4 MAR
Germany PMI Services 52.6 Prelim APR (exp. 52.3) vs 52.1 MAR
Germany CPI 2.2% APR Prelim. Y/Y (exp. 2.2%) vs 2.3% MAR
Germany GfK Consumer Confidence Survey 5.6 MAY (exp. 5.9) vs 5.8 APR
Germany Import Price Index 3.1% MAR Y/Y (exp. 3.3%) vs 3.5% FEB
France PMI Manufacturing 47.3 Prelim APR (exp. 47.4) vs 46.7 MAR
France PMI Services 46.4 Prelim APR (exp. 50.1) vs 50.1 MAR
France Production Outlook Indicator -14 APR vs -15 MAR
France Own-Company Production Outlook -4 APR vs 8 MAR
France Business Confidence Indicator 95 APR vs 98 MAR
France Consumer Confidence Indicator 88 APR vs 87 MAR
France Business Survey Overall Demand 3 APR vs -8 MAR
France Producer Prices 3.7% MAR Y/Y (exp. 4%) vs 4.1% FEB
France Consumer Spending -2% MAR Y/Y (exp. -0.2%) vs 0.2% FEB
UK Q1 GDP Initial -0.2% Q/Q (exp. 0.1) vs -0.3% in Q4 [0.0% Y/Y (exp. 0.3%) vs 0.5% in Q4]
UK CBI Business Optimism 22 APR (exp. -18) vs -25 MAR
UK Public Sector Net Borrowing 15.9B GBP MAR vs 9.9B GBP FEB
Italy Consumer Confidence 89 APR [= lowest since data began in 1996] (exp. 96.2) vs 96.3 MAR
Italy Hourly Wages 1.2% MAR Y/Y vs 1.4% FEB
Italy Business Confidence 89.5 APR (exp. 92.1) vs 91.1 MAR
Italy Retail Sales 0.1% FEB Y/Y (exp. -1.9%) vs -1.1% JAN
Spain Mortgage on Houses -47.1% FEB Y/Y vs -41.3% JAN
Spain Producer Prices 3.3% MAR Y/Y vs 3.4% FEB
Spain CPI 2.0% APR Prelim Y/Y vs 1.8% MAR
Spain Retail Sales -3.9% MAR Y/Y vs -3.6% FEB
Spain Unemployment Rate 24.44% in Q1 vs 22.85% in Q4 [youth unemployment = 52.0%]
Switzerland Exports -2.5% MAR M/M (exp. 1%) vs 12% FEB
Switzerland Imports 4.6% MAR M/M vs -12.2% FEB
Swiss watch exports +18.9% in March, slowed less than expected in HK and China
Switzerland UBS Consumption Indicator 1.22 MAR vs 0.90 FEB
Switzerland KOF Swiss Leading Indicator 0.40 ARP vs 0.09 MAR
Ireland Property Prices -16.3% MAR Y/Y vs -17.8% FEB
Ireland PPI 2.6% MAR Y/Y vs 2.3% FEB
Sweden Consumer Confidence 4.7 APR (exp. 1) vs 0 MAR
Sweden Manufacturing Confidence -1 APR (exp. -1) vs 1 MAR
Sweden Economic Tendency 100.9 APR (exp. 100.5) vs 101.7 MAR
Sweden PPI 0.2% MAR Y/Y (exp. 0.1) vs 0.5% FEB
Sweden Retail Sales 4.5% MAR Y/Y (exp. 3.4%) vs 3.5% FEB
Finland Unemployment Rate 8.5% MAR vs 7.7% FEB
Finland Consumer Confidence 10.4 APR (exp. 9) vs 8 MAR
Finland Business Confidence -2 APR (exp. -2) vs -5 MAR
Finland House Prices 0.9% in Q1 Y/Y vs 0.9% in Q4
Belgium PPI 3.18% APR Y/Y vs 3.37% MAR
The European Week Ahead:
Sunday: Apr. UK Hometrack Housing Survey
Monday: Mar. Eurozone M3 Money Supply; Mar. Germany Retail Sales; 1Q Spain GDP - Preliminary; Feb. Spain Total Housing Permits, Current Account; Apr. Italy CPI – Preliminary; Feb. Greece Retail Sales
Tuesday: Apr. UK PMI Manufacturing
Wednesday: Apr. Eurozone, Germany, and France PMI Manufacturing - Final; Mar. Eurozone Unemployment Rate; Apr. Germany Unemployment Data, Unemployment Change and Unemployment Rate; Apr. UK PMI Construction, Lloyds Business Barometer; Mar. UK Net Consumer Credit, Net Lending Sec. on Dwellings, Mortgage Approvals, M4 Money Supply; Spain Manufacturing PMI; Apr. Italy PMI Manufacturing, New Car Registrations, Budget Balance; Mar. Italy Unemployment Rate – Preliminary, PPI; Greece Manufacturing PMI
Thursday: Eurozone ECB Policy Meeting, Announces Interest Rates; Mar. Eurozone PPI; Apr. UK Nationwide House Prices, PMI Services, Official Reserves; Apr. Spain Unemployment MoM
Friday: Apr. Eurozone PMI Composite and Services - Final; Mar. Eurozone Retail Sales; Apr. Germany and France PMI Services – Final; Apr. UK New Car Registrations; Spain Services PMI; Apr. Italy PMI Services
Sunday: Probable French Election Run-off; Greece elections; Regional German Election in State of Schleswig-Holstein
Extended Calendar Call-Outs:
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
