European Positions Update: Long German Bunds (BUNL); Short France (EWQ)
Asset Class Performance:
- Equities: The STOXX Europe 600 closed down -2.4% week-over-week vs up +1.7% last week. Bottom performers: Russia (RTSI) -6.0%; Italy -4.1%; Cyprus -3.9%; Netherlands -3.1%; Germany -2.6%; Ireland -2.5%; Finland -2.4%; Spain -2.2%. Top performers: Denmark +1.9%; Poland +1.2%; Portugal +1.0%; Romania +40bps.
- FX: The EUR/USD is down -1.23% week-over-week vs +1.03% last week. W/W Divergences: CZK/EUR -1.36%, PLN/EUR -0.58%, RUB/EUR -0.34%, SEK/EUR -0.24%, NOK/EUR -0.00%, CHF/EUR 0.00%; GBP/EUR +0.56%
- Fixed Income: Greece’s 10YR government bond yield saw the biggest decline of -39bps to 20.57% week-over-week. Italy and Spain closely followed, declining -29bps for Italian yields to 5.42% and -25bps to 5.70% for the Spanish 10YR yield. Portugal was one country to see an inflection, gaining +23bps to 10.83%.
Elections across Europe this weekend present the opportunity for new faces, but with them key challenges to Europe’s forward looking policy path on sovereign debt and banking risks. This weekend sees presidential elections in France and Greece, local and municipal elections in Italy, and a state election in Germany.
Of particular attention is the French presidential election on Sunday. While still a relatively tight race, it looks to result in a victory for the Socialist candidate Francois Hollande, especially as the incumbent Nicolas Sarkozy has failed to receive the vote of endorsement from minority parties in recent days. [Holland leads Sarkozy 53.5% to 46.5% according to TNS Sofres poll, and by a margin of 52.5% to 47.5%, according to BVA and Ipsos polling companies].
For France, we think Hollande’s socialist agenda presents a tax on the French state, already suffering with high debt levels, and a financial transaction tax (supported by both Mssrs. Hollande and Sarkozy) would put it on an uncompetitive island versus its neighbors. [For more details on Hollande’s agenda see our recent work including, “Stinky Cheese”; and Weekly European Monitors titled “Socializing Growth as Governments Crumble” and “Sarkophobia”].
Directly below we show a chart of the DAX (Germany), CAC (France), IBEX (Spain), and RTSI (Russia) on a year-to-date basis. Interestingly all markets topped on March 16th, but we think the underperformance of the CAC (down -11.5% since 3/16) versus the German market also corresponds with polls from February onward showing a more decisive spread in Hollande’s favor, as the market prices in Hollande’s agenda holding growth below already subdued levels.
For Europe we think a Hollande victory will spell the end of a strong working relationship between Sarkozy and Germany’s Chancellor Angela Merkel, or Merkozy. Hollande’s socialist agenda cuts against the German voice that Europe needs to stay the course on fiscal consolidation. He is also against the Fiscal Compact, which Germany continues to support. Broadly, we could well see a much divided voice on Europe’s go-forward strategy to assess its sovereign and banking issues from two main economic and political heavyweights. This bodes very poorly for policy when already Europe is competing across 17 to 27 parliaments for any given agreement.
Greek elections are also critical. Despite the diminutive size of the economy, the last two years have proven out that even a small fry economy like Greece can inflect global markets. What’s unclear is if the two main parties, Pasok and New Democracy, out of ten parties running, will be able to secure a majority. [Note: opinion polls have not been published since April 20 because of local electoral laws.] The two need 300 seats between them in order to renew their coalition government. If they lack a majority, there’s a high probability new elections will need to be called by the Fall, all of which puts the existing bailout packages, including terms for payments between the Greek government and troika, the European Commission, and the IMF, at risk. Another question that remains unanswered is the popular support of Greeks to stay in the Eurozone. It’s worth noting that New Democracy and Pasok could still hold a decent majority even if their combined share fell below 45% since the party that places first in the election automatically gets an extra 50 seats.
A German state election in Schleswig-Holstein may get less press behind France and Greece this Sunday, but will be critical for Chancellor Merkel, whose CDU party is vying to hold on to a share of power in the northern state (bordering Denmark) and to re-enter the government of North Rhine-Westphalia, the largest state, a week later. Opinion polls for Schleswig-Holstein show the CDU and opposition Social Democrats (SPD) in a dead heat at 31%, as Merkel begins to rethink her current and fledgling alliance with the Free Democrats (FDP) in favor of the SPD, in what is known as a the “grand coalition”.
Meanwhile Italy is holding local and municipal elections on May 6-7 in more than 1,000 cities. The outcome will be an important gauge of the mood since Mario Monti took office from Silvio Berlusconi and the massive austerity that Monti has carried through.
Switching gears, this week EU finance ministers failed to reach an agreement to toughen bank capital rules, namely to fix banks’ core capital requirements at 7% of their risk-weighted assets, due to stiff opposition from Britain in particular. The ministers now aim for a deal at their next meeting on May 15. According to Bloomberg, agreement among finance ministers will serve as a basis for negotiations with the European Parliament, which could begin later this month. The EU faces a Jan. 1, 2013, deadline for adopting rules agreed on by the Basel Committee on Banking Supervision.
Finally, 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. Final PMIs (Services and Manufacturing) for the Eurozone remain comfortably below the 50 line that marks contraction, as the Eurozone Unemployment Rate jumped 10bps to 10.9% and Eurozone Retail Sales were weak for the month of March.
German banks reduce exposure to Spain: Bundesbank data showed that German banks have been reducing their exposure to Spain, which peaked at €200B at the start of 2008, and down 17% to €113B last year, marking the largest pullback in percentage terms by German banks from any of the peripheral Eurozone countries.
Spanish and Italian banks load up on sovereign bonds: According to ECB data (that captures the second LTRO) Italian and Spanish banks loaded up on government debt in March. Italian banks increased their holdings of Eurozone government bonds by a record €23.7B in April, bringing their total to €323.9B. Spanish banks increased their holdings by €20.1B, bringing their total to a record €263.3B.
Greece: ECB data showed that businesses and consumers stopped pulling money out of Greek banks in March. Private sector deposits in Greek banks increased 0.5% in March after a nearly -2.7% decline in February. However, they are still 30% below their December 2009 peak. The article also noted that private sector deposits in Portugal fell by 1.8% to their lowest level since May of last year, though Spain, Ireland, and Italy all posted small increases.
Italy plans spending cuts to avoid VAT increase: Prime Minister Mario Monti's technical government plans to cut public spending by €4.2B this year to keep Italy on track to meet its deficit targets (1.7% of GDP in 2012), rather than resort to a planned 2% increase in the VAT that could potentially deepen the recession.
Global investors resume retreat from Eurozone debt: Reuters noted that surveys of 55 leading investment firms in the US, continental Europe, Britain, and Japan revealed that global investors resumed their exit from the Eurozone bond market in April, cutting their holdings to the lowest level in a year. Holdings of Eurozone bonds in balanced portfolios fell to 24.5% last month from 26% in March and the 26.9% recorded at the height of the crisis in November. It added that European funds were the most bearish, as a monthly survey of 16 asset managers based in continental Europe showed a typical balanced portfolio held 55.1% of bonds in the Eurozone, down from 58.7% in the prior month.
CDS Risk Monitor:
Week-over-week CDS was down, but marginally compared to recent weeks, across the main countries we track. Italy saw the largest declines in CDS w/w, -15bps to 437bps, followed by Ireland -14bps to 565bps; Portugal inflected to the upside gaining +14bp to 1009bps.
Eurozone Unemployment Rate 10.9% MAR vs 10.8% FEB
Eurozone Retail Sales -0.2% MAR Y/Y (exp. -1.1%) vs -2.1% FEB [0.3% MAR M/M (exp. 0.0%) vs -0.2% FEB]
Eurozone CPI Estimate 2.6% APR Y/Y vs 2.7% MAR
Eurozone M3 3.2% MAR Y/Y vs 2.8% FEB
Eurozone PPI 3.3% MAR Y/Y (exp. 3.4%) vs 3.6% FEB
Germany Unemployment Rate 6.8% APR vs 6.7% MAR revised to 6.8%
Germany Retail Sales 2.3% MAR Y/Y (exp. 0.5%) vs 2.1% FEB
Germany VDIK Apr new passenger car registrations +3.0 y/y
UK PMI Manufacturing 50.5 APR (exp. 51.5) vs 51.9 MAR (export orders off most since ‘09)
UK Nationwide House Prices -0.9% APR Y/Y vs -0.9% MAR [-0.2% APR M/M vs -1.0% MAR]
UK New Car Registrations 3.3% APR Y/Y vs 1.8% MAR
UK Halifax House Prices -0.5% APR Y/Y (exp. 0.4%) vs -0.6% MAR
UK PMI Construction 55.8 APR vs 56.7 MAR
UK Money Supply -5% MAR Y/Y vs -4.1% FEB
Spain Total Housing Permits -36.2% FEB Y/Y vs -22.9% JAN
Spain Q1 Prelim. GDP -0.3% Q/Q (exp. -0.4%) vs -0.3% in Q4 [-0.4% Y/Y (exp. -0.6%) vs 0.3% in Q4]
Italy Unemployment Rate 9.8% MAR Prelim vs 9.6% FEB
Italy CPI Prelim. 3.8% APR Y/Y vs 3.8% MAR
Italy PPI 2.7% MAR Y/Y vs 3.2% FEB
Switzerland Retail Sales 4.2% MAR Y/Y (exp. 1.1%) vs 0.8% FEB
Ireland Industrial Production -5.7% MAR Y/Y vs -3.0% FEB
Ireland Unemployment Rate 14.3% APR vs 14.3% MAR
Sweden Household Lending 5% Y/Y MAR vs 5% FEB
Denmark PMI Survey 61.8 APR vs 53.0 MAR
Denmark Retail Sales 1.2% MAR Y/Y vs -0.2% FEB
Portugal Industrial Production -5.8% MAR Y/Y vs -7.2%
Portugal Retail Sales -8.9% MAR Y/Y vs -8.3% FEB
Greece Retail Sales -11.1% FEB Y/Y vs -8.8% JAN
Turkey CPI 11.14% APR Y/Y vs 10.43% MAR
Turkey Producer Prices 7.65% APR Y/Y vs 8.22% MAR
Interest Rate Decisions:
(5/3) ECB Interest Rate UNCH at 1.00%
(5/3) Czech Repo Rate Announcement UNCH at 0.75%
The European Week Ahead:
Sunday: French Election Run-off; Greece Parliamentary Election; Regional German Election in State of Schleswig-Holstein; Italian local and municipal elections
Monday: May Eurozone Sentix Investor Confidence; Apr. Germany Wholesale Price Index (May 7-12); Mar. Germany Factory Orders: Apr. UK BRC Shop Index, Lloyds Employment Confidence, RICS House Price Balance; Mar. Spain Industrial Output
Tuesday: Mar. Germany Industrial Production; Apr. UK BRC Sales Like-For-Like
Wednesday: Mar. Germany Exports, Imports, Current Account, Trade Balance; Apr. France BoF Business Sentiment; Mar. France Trade Balance; Apr. Greece Consumer Price Index
Thursday: May ECB Publishes Monthly Report; BoE Announces Rates; BoE Asset Purchase Target; Apr. UK NIESR GDP Estimate; Mar. UK Industrial Production, Manufacturing Production; Mar. France Industrial Production, Central Government Balance, Manufacturing Production; Mar. Spain House Transactions; Mar. Italy Industrial Production; Mar. Greece Industrial Production; Feb. Greece Unemployment Rate
Friday: EC Releases Economic Growth Forecasts; Apr. Germany Consumer Price Index – Final; Apr. UK PPI Input and Output; France Survey of Industrial Investments; Apr. Spain Consumer Price Index - Final