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Dollar Hostages

“I am determined that the American Dollar must never again be hostage in the hands of international speculators.”

-President Richard Nixon, 1971


In Currency Wars (page 86), Jim Rickards highlighted that very sad day in US Economic history (August 15th, 1971) when Nixon abandoned the Gold Standard and officially made the US Dollar a political football. We’re all hostage to its Correlation Risk now.


In the 1970s, Nixon would say “we’re all Keynesians now.” Jimmy Carter, George W. Bush, and Barack Obama’s economic policies of the 1970’s and 2000’s  would agree with that. But are we? Collectively, I think America is smarter than that. When something doesn’t work, we stop doing it – eventually. Monetarily, Reagan got that right. Fiscally, Clinton did. The People forced them to.


With Correlation Risk running at generational highs, “speculators” take their cue from the US Dollar. And the US Dollar takes its lead from policy makers. Markets are hostage to what the Dollar does because this is what we asked for. We asked for Bernanke. We asked for bailouts. Now that we see how this movie ends (Europe), are we going to be asking for more?


Back to the Global Macro Grind


Last week the USD was up for the 2ndweek in a row, trading up +0.96% to $80.26 on the US Dollar Index. Since Bernanke has trained them to expect short-term asset price inflation, Stock and Commodity Markets really do not like it when that happens. In the face of US Dollar strength, stocks and commodities were both down for the 2nd consecutive week.


The bad news about short-term commodity price inflation is that it Slows Global Economic Growth. If you are a country like India or Japan (and you are a net importer of Oil) you really get jammed by this sort of thing.


India’s Sensex Index was down another -0.54% last night (down -12.1% from where it topped when growth started slowing in February) after reporting that it’s Wholesales Price Index for April inflated, sequentially, to +7.2% versus +6.9% in March.


The good news about short-term stock and commodity price inflations is that they deflate. Sometimes fast. That’s plainly obvious to anyone who has blown up other people’s money being levered long Commodities at the Q1 tops of 2008, 2010, 2011 – and now, 2012.


With the US Dollar up +0.96% last week, here’s your highly correlated move lower in Commodity prices:

  1. CRB Commodities Index (19 Commodities) = down another -2% (down -11% from their February 2012 top)
  2. WTIC Oil = down another -4% (down -11% from its February 2012 top)
  3. Gold = down another -4% (down -11% from its February 2012 top)

I couldn’t make up how linear and correlated these moves have been since February if I tried. God only knows Bernanke has avoided discussing the words Dollar, Correlation, and Risk like the bubonic plague (for good career risk management reason). But that certainly doesn’t mean these Correlation Risks to market prices cease to exist.


You see, if I was tasked with “price stability”, the last thing I’d do is bring up the causality (policy) driving people to “speculate” on up/down Gold and Oil prices. Accountability isn’t a word in Washington. And that’s just plain sad too.


Accountability in performance is definitely a word in the asset management community. Looking at the latest CFTC Commodities options data (Bloomberg) consider the following:

  1. Bullish bets on commodity contracts (19 CRB components) dropped -19% week-over-week last week! (723,239 contracts)
  2. Bullish bets on Gold contracts tanked -20% last week (to 92,498 contracts) = lowest level since December 2008!
  3. Bullish bets on US Farm Goods swooned -15% week-over-week to 435,801 contracts

In other words, if you bought the top in Commodities in February – and you did that with leverage – you’re definitely blowing up right here and now. Gold and Copper are down another -1.5% and -2.8%, respectively this morning!


Yes, that’s an exclamation point. I don’t use them that often. But they are very appropriate. We are fighting the Fed, and winning.


As a reminder, our Top 3 Global Macro Themes for Q2 of 2012 are:


1.       The Last War: Fed Fighting

2.       Bernanke’s Bubbles (Commodities)

3.       Asymmetric Risks


These were not easy calls to make at the end of another Q1 YTD top in Global Equities and Commodities. Neither was it easy to write a note titled “Selling Opportunity” in US Equities when they went green momentarily on Friday.


This Globally Interconnected Game of Risk is not easy. Neither is it going to be easy to convince the American People that they should be Dollar Hostages for another one of these Qe’s. Been there, done that (multiple times) – and it didn’t work.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, EUR/USD, and the SP500 are now $1, $109-45-113.89, $1.28-1.30, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Dollar Hostages - Chart of the Day


Dollar Hostages - Virtual Portfolio


“Before all else, be armed.”



For Howard Schultz, it is all about winning.  Even when he doesn’t want to communicate it, he does.  The word “Machiavellian” has come to represent, for many people, any human behavior that is cynical and self-interested.  While Schultz seems to have a strong social conscience – and this is meant as a compliment – we can’t help but believe that the single-serve strategy being employed by Starbucks seems to rhyme with The Prince, Machiavelli’s most famous book.  An appearance by Mr. Schultz on CNBC yesterday illustrates this perfectly.


We have been of the opinion for some time that Starbucks has never really intended to sit idly by and allow Green Mountain to dominate the home brewer market.  When Starbucks signed an agreement with Green Mountain in early 2011, we noted that the long term commitment of Starbucks to the Keurig brewer was conspicuous in its absence.  On the one hand, K-Cups are not a significant enough portion of the business to merit the amount of attention that Starbucks investors have been paying to the Green Mountain fall out.  On the other hand, while K-Cups only represent approximately 12% of the company’s earnings, the longer term upside for Starbucks appears much greater if it were able to capture a significant portion of what is currently Green Mountain’s business. 


Timing is everything and we believe that Starbucks is acutely aware of this as it cuts its teeth in the single serve business.  Showing its hand too early would obviously increase pressure on Green Mountain and possibly negatively impact Starbucks’ K-Cup business as it currently stands.  For that reason, we believe that Starbucks is to Green Mountain what the Trojan Horse was to Troy.  The partnership of Starbucks with Green Mountain is allowing Schultz and his team to get his product to customers in the home/office channel while building their knowledge of the single-serve category.  Manufacturing its own brewer is a clear step towards independence from Green Mountain and, we believe, when the stockpile of ammunition is sufficient, Starbucks will attack the home brewer segment.  Like a true Machiavellian Prince, Schultz will do so in one fell swoop – when the timing is right to do so.


Within the CNBC interview, Schultz responds to a question on Starbucks’ new machine being a sign that his company is unwilling to commit to a longer-term single-serve partnership with Green Mountain.  His statement that Starbucks “has the winning hand” offers us a glimpse of his competitive nature.  Irrespective of any wooden platitudes describing the complementary nature of the two companies’ respective brewers, his “winning hand” comment (a slip?) was a signal of intent.


Below is a paraphrased transcript of the exchange between Schultz and CNBC with our commentary on each exchange.


CNBC: Howard, you're coming out with your own single service machine later in the year to compete with the Keurig from Green Mountain.  Is that a sign you're unwilling to make a long-term commitment to Green Mountain and the K-cups you currently have a partnership on?


Schultz: I think the introduction with Verismo coming out this holiday is misunderstood.  It's not in competition with Green Mountain.  It is a complimentary machine -- Starbucks will have the winning hand because of VIA -- the platform we're on with Green Mountain with their 12 million machines of install base, and we already have 15% share and that's going to grow with us and them. We're coming out with a machine that's going to do something no other machine does, and that is make a perfect latte because we've cracked the code in terms of the technology on fresh milk, but it's a complementary machine.  Our partnership with Green Mountain is stable; I've talked to them.   You have to separate their problems and what happened with their chairman from the fact remains their install base is 12 million machines and those customers want Starbucks k-cups, and we're going to provide them.


HEDGEYEWe believe that the premise of this question was slightly off base in that the original agreement between Starbucks and Green Mountain gave no indication of any intent to maintain a long term partnership. 


The introduction of Verismo, with respect to Mr. Schultz, is not misunderstood.  Some consumers will replace their Keurig machines with it, some will not; they are in competition with each other.  We would not be surprised if Starbucks were already working on a home brewer that competes offers brewed coffee as well as espresso.


It’s difficult to prove and we are not qualified to make such an assertion, but the statement (or slip?) that “Starbucks has the winning hand” does not suggest that Schultz intends to curb his competitive instincts in his approach to single serve or any other area of his business.  Before he expresses it outwardly with respect to single serve, he will ensure he is armed and prepared.



CNBC: Are you friends, are they enemies, are they frenemies? What is your partnership with Green Mountain?


Schultz:  We have a very good partnership with Green Mountain and they knew all along we have interest in the espresso platform.  The espresso platform we introduce this fall it's going to be a game changer but not at their expense.  I think the market has overreacted with regard to us coming out with a machine they believe is going to be competitive to Green Mountain.  We will coexist.  We will sell k-cups in a big way and create a next generation game changing machine this holiday in every Starbucks store and every retail store in the country.


HEDGEYE:  The companies will co-exist but you can be sure that their respective positions in the home brewer segment will be different than they are today.  Schultz is handling an awkward situation very well but he is well aware of the opportunity that usurping Green Mountain in the single serve industry represents over the long term. 


THE (COFFEE) PRINCE - prince schultz



Howard Penney

Managing Director


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Don’t Fight the Fed… In Brazil?

Conclusion: All told, we continue to view Brazil’s intermediate term economic outlook as supportive for Brazilian equities over that duration and, while the recent spate of Big Government Intervention has cast a dark cloud of regulatory uncertainty over Brazilian assets and introduced new risks to Brazil’s economy over the long term, our analysis suggests concerns here are vastly overblown – creating a fair amount of asymmetry between what’s being priced in relative to Brazil’s fundamental outlook.


Virtual Portfolio Position: Long Brazilian equities (EWZ).


While we pride ourselves on the highly differentiated nature of our Global Macro research, one certainly does not require a three-factor quant model borne out of the principles of chaos theory to know that this isn’t good:


Don’t Fight the Fed… In Brazil? - 1


Per the MSCI index in the chart above, Brazilian Financials stocks have retraced roughly 90% of their gains from their SEP ’11 trough in just over two months – largely on the strength of the central government’s plan drive down interest rates throughout the Brazilian economy, which will ultimately put a great deal of pressure on the profitability Brazil’s domestic banking sector.


Per President Rousseff: “[Brazil] will only be competitive when interest rates fall to global levels.” Per Nelson Barbosa, her Secretary for Macroeconomic Policy at the Ministry of Finance, last week’s changes to the 150-year-old savings account minimum return mandate (“poupanca” was reduced to 70% of SELIC rate when it falls < 8.5% vs. 7.3% per annum previously) will leave room for the benchmark SELIC rate to be cut to “as low as it needs to go”. According to the MOF spokespeople, lower interest rates will reduce pressure on debtors across all sectors, which, in turn, will drive down default rates – which have trended up over the last ~18 months and now rest at 5.7% across the entire banking system – and ultimately allow banks to maintain reasonable profit growth by accelerating underwriting into a healthier, more robust economy.


Don’t Fight the Fed… In Brazil? - 2


It’s clear that Rousseff and Co. are making a enormously “levered” bet on the Brazilian and its ability to repay debt in a lower interest rate environment. If they are right, Brazilian economic growth could accelerate to new heights over the long term, putting Brazil on par with some of its faster-growing “BRIC” competitors.


On the flip side, their politicized reforms could ultimately backfire and spur higher rates of inflation as credit and consumption growth expand faster than growth rates of productive capacity and/or the real continues to make a series of lower-highs over the long term as Brazil’s global real interest rate advantage (2nd highest globally) is eroded on top of global investors increasingly shunning Brazilian assets due to accelerating political interference (see: Value CEO ouster, IOF tax hikes and now this state-directed crusade to lower interest rates). Recent USD-debt issuance trends and Bovespa net flows data help elucidate the ill-effect the latest round of capital controls and Big Government Intervention have had on Brazil’s foreign investment inflows:


Don’t Fight the Fed… In Brazil? - 3


Don’t Fight the Fed… In Brazil? - 4


A banking crisis is also a heightened tail risk in any downside economic scenario over the long term if heightened liquidity temporarily masks an erosion of credit quality across the industry (i.e. systematic “adverse selection”).


As usual, time will reveal all truths. Right now, however, our task as Global Macro risk managers is to figure out what’s priced in and make a call on the more probable of the aforementioned scenarios from here.



Alluding to the chart above, it wouldn’t be a stretch to suggest that a secular narrowing of Net Interest Margins (NIMs) is in store for Brazilian banks as the government forces the industry to lower lending rates (likely affecting private banks via increased competition from state banks). Average interest rates on Brazilian loans were 37.3% per the latest report (MAR) – good for a 2,830bps cushion above the SELIC.


Don’t Fight the Fed… In Brazil? - 5


Looking at NIMs from a more traditional perspective, Brazilian banks in aggregate enjoy an average NIM of 2,800bps (MAR). Interestingly, this ratio has stayed largely flat over the past 10+ years, despite the SELIC rate being cut by nearly two-thirds over this time period. Also interesting, when analyzing NIM by sector (though not necessarily how it’s done in actuality), the spread between consumer lending and deposit rates has trended down over time roughly in line with the fall in the SELIC; a similar spread has trended UP over time in corporate credit operations.


Don’t Fight the Fed… In Brazil? - 6


Looking at inflation, both Brazil’s 2015 Breakeven Inflation Rate and L/T sovereign debt yields have actually trended down over the last two months – suggesting that long-term inflation expectations in the Brazilian fixed income market are not currently being exacerbated by the aforementioned drive to lower interest rates. This is a noteworthy signal, given that roughly 20yrs ago, the Brazilian economy was experiencing severe hyperinflation, which itself was buoyed by rapid credit expansion (YoY growth north of +4,000%!).


Don’t Fight the Fed… In Brazil? - 7


Don’t Fight the Fed… In Brazil? - 8


It could be argued, however, that the Brazilian central bank has become completely politicized, and any policy response to inflation will be both muted and delayed – thus suppressing the signaling ability of the Brazilian interest rate curve. While we stand counter to this view, investors would be keen to keep an eye on real asset prices in the Brazilian economy. Housing inflation accelerated dramatically to +12-13% per year during Brazil’s 2002-03 inflation scare (CPI peaked at +17.2% YoY in MAY ’03), which was largely predicated by a -47% fall/devaluation of the BRL vs. the USD during the global EM scare and ahead of the Lula presidency.


Don’t Fight the Fed… In Brazil? - 9


To many in Brazil, these events and the hyperinflation saga of the 1990’s are not far enough in the past to escape the cognitive anchoring that naturally occurs with Big Government Intervention targeting lower rates of both interest and foreign exchange – of which current market expectations over the NTM are for -100bps and -5.4% (via 1yr OIS and 12mo USD/BRL forward rates). We continue to view the market sentiment here as both extreme and asymmetric, given where our predictive tracking algorithms suggest the slopes of Brazilian economic growth and inflation are headed over the intermediate term. Refer to our MAY 3 note titled, “What the Heck Is Going On In Brazil?” for more details regarding this topic and our bull thesis on Brazil from here.


Per the latest central bank minutes: “… even considering that the activity recovery has occurred more slowly than anticipated, the Committee believes that, given the cumulative and lagged effects of policy actions implemented so far [i.e. 350bps of rate cuts], any movement of additional monetary easing should be conducted with parsimony.” Brazilian FX and interest rate markets are pricing in far more easing than suggested by the central bank’s guidance – an event that could lead to, at a bare minimum, a floor in the BRL/USD cross in short-to-intermediate term. We walk through precisely how this event would be supportive of Brazilian equities (via a positive inflection in earnings growth) in the aforementioned note.



We’ve already alluded to the more negative of the two scenarios laid about above, which leaves the positive scenario as the one in which we view as more probable over the long term. We are currently long (and wrong) Brazilian stocks in our Virtual Portfolio as a way to play what we view as a highly probable positive inflection point in Brazil’s economic fundamentals over the intermediate term. Thus, we are aware that our positioning might cause some clients to question whether or not we’re viewing the recent spate of policy maneuvers out of Brazil with an Optimistic Bias.


While we wouldn’t refute that as being a risk, our analytical integrity will always trump any Virtual Portfolio trade or research call we make; Brazil here is no exception and we’ll happily book the loss if it becomes clear to us that the government has no plan to combat the key risks we’ve highlighted above. For now, we are comfortable giving Brazilian policymakers the benefit of the doubt, given that they have shown us they can go both ways on both the fiscal and monetary policy front, depending on what the Brazilian economy has required, since Rousseff and her team took over the reins.


Taking a “glass half full” approach to the recent events, it’s clear to us that Brazil has an enormous opportunity to grow its economy by easing liquidity conditions, though this gain is likely to come at the expense of Brazil’s relatively high Return On Equity (ROE) across the banking sector. Still, one man’s trash is another man’s treasure; despite having a consumer debt service burden that is twice that of the US, Brazil’s aggregate consumer indebtedness and mortgage burden are a fifth and a fourth of their US equivalent ratios, respectively. While no doubt an apples-to-oranges comparison, we accept the US as an easily-digestible proxy of what Brazil could become given this hyper focus on improving domestic financial conditions and international competitiveness.


Don’t Fight the Fed… In Brazil? - 10


Don’t Fight the Fed… In Brazil? - 11


Credit growth – particularly in the consumer sector where growth has slowed by over one-third since peaking in FEB ’11 – could be poised to rebound in the coming quarters amid incessant urging from the central government and increased public/private competition among Brazilian banks. We’d be remiss to ignore the fact that during the Global Financial Crisis the Bovespa Index bottomed in OCT ’08 – well ahead of other global equity markets – as rapid [state-urged] credit expansion helped mitigate the effects of the Great Recession upon the Brazilian economy.


Don’t Fight the Fed… In Brazil? - 12


As an aside, Brazil has developed a tendency to cyclically trough well ahead of other global equity markets during the recent Global Macro summertime selloffs (OCT ’08, MAY ’10 and early AUG ’11).


Ironically, one area where the government’s recent drive to lower interest rates is potentially being dramatically mispriced is on the currency front. Our analysis shows the BRL/USD cross to be positively correlated with a narrowing of the Brazilian central government budget deficit – which would be a natural byproduct of a lower interest rate environment (assuming Rousseff and Mantega maintain their pledge to be fiscally hawkish). Brazil, which has enjoyed a persistent primary surplus of around +3-4% of GDP over the last 10+ years, has posted fairly wide budget deficits ranging from (2%)-(6%) of GDP over that same duration.  This is a direct function of Brazil’s elevated interest expense burden, which has ranged from +5-9% of GDP over the last 10+ years.


Don’t Fight the Fed… In Brazil? - 13


Don’t Fight the Fed… In Brazil? - 14


Net-net, any move toward fiscal tightening will help offset any inflationary pressures being introduced by this pending acceleration in liquidity throughout the economy.



All told, we continue to view Brazil’s intermediate term economic outlook as supportive for Brazilian equities over that duration and, while the recent spate of Big Government Intervention has cast a dark cloud of regulatory uncertainty over Brazilian assets and introduced new risks to Brazil’s economy over the long term, our analysis suggests concerns here are vastly overblown – creating a fair amount of asymmetry between what’s being priced in relative to Brazil’s fundamental outlook.


Have a great weekend,


Darius Dale

Senior Analyst


The Economic Data calendar for the week of the 14th of May through the 18th 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.



Weekly European Monitor: Moving the Goalposts, Again!

European Positions Update: Short Italy (EWI)


Asset Class Performance:

  • Equities:  The STOXX Europe 600 closed down -0.4% week-over-week vs -2.4% last week. Bottom performers: Cyprus -15.4%; Greece -11.3%; Ukraine -9.8%; Romania -6.4%; UK -3.3%; Hungary -2.9%; Ireland -2.9%; Denmark -2.6%.  Top performers:  Spain +1.7%; Netherlands +1.4%; Slovakia +1.0%; Italy +90bps; Finland +80bps.  
  • FX:  The EUR/USD is down -1.15% week-over-week vs -1.23% last week.  W/W Divergences: PLN/EUR -1.11%, HUF/EUR -0.96%, SEK/EUR -0.74%, CZK/EUR -0.32%; CHF/EUR +0.02%, DKK/EUR +0.05%, NOK/EUR +0.19%, GBP/EUR +0.74%
  • Fixed Income:  Greece’s 10YR government bond yield saw the biggest gain of +396bps to 24.53% week-over-week. Spain gained +28bps to 5.98% and Portugal rose +13bps to 10.96%.

Weekly European Monitor: Moving the Goalposts, Again! - 11. YIELDS



In Review:

It was yet again another week in which Europe dominated the headlines, with Greece and Spain taking most of the attention. In the mix this week the Bank of England kept its interest rate and asset purchasing program on hold, as expected, and the European Commission revised down its growth targets for much of the periphery, while boosting Germany’s (more below under Call Outs). However, it was also a week in which Russia’s Vladimir Putin and Dmitry Medvedev were confirmed, switching roles to become President and Prime Minister, respectively. For those of you that missed it, Putin put on a show in an inauguration day hockey game. Here’s a link to the video: http://www.youtube.com/watch?v=sMpR1AQmGkQ&fb_source=message. Vlady, who recently learned how to skate, propelled his team to a 3-2 victory with two assists and the game winner (surprised?).


As Keith has mentioned, the Russian stock market is down -16.6% since March 14th (when most Global Equity markets topped for the year) and is a good example of why the USD Correlation Risk matters so much – Russia is a Petro Dollar market, so with the USD up for the 8th consecutive day (and the Petro snapping his $113.87 Brent line), this is not good.



A Greek Tragedy


This week saw each of the three main Greek parties (New Democracy, Syriza, and Pasok) try to form a coalition with each another, only to come up short each time. There’s new hope from some that Pasok leader Evangelos Venizelos can put together a unity government given a shift in stance on the part of Democratic Left leader Fotis Kouvelis, who has broken ranks with Syriza, which it had backed earlier in the week. (Syriza is thoroughly against the mandates of austerity, and may be the most divisive partner in a coalition build).


As uncertainties of the prospects for a coalition persist, the calling of another general election seems a very probable event, which could come as soon as June 10th or June 17th. Here it’s important to note that despite the unknown on the future shape of the Greek government, what’s key is the strong voice from the Greek people to stay with the EUR currency and in the Eurozone. So despite all the noise from headlines discussing a Greek exit from the Eurozone (example: a Bloomberg Global Poll recorded a 50% chance Greece exits the Eurozone this year), we do not see this as a probable event for Greece in 2012. We expect the future Greek government to play ball with Brussels (and Troika for its bailouts), with more concessions likely to come from Brussels (and consent from the Germans swinging the largest bat), as Eurocrats are determined to save the existing Union. Greece will likely moderate its austerity push in favor of growth strategies (at least rhetorically), but really to appease a population pushing back at the consolidation of government spending. We think the most relevant quote of the week expressing this view came from Germany’s Finance Minister Wolfgang Schaeuble:


“If Greece decides not to stay in the Eurozone, we cannot force Greece. They will decide whether to stay in the euro zone or not.”



Spain’s Shifting Pain

After Wednesday’s announcement that Bankia, the banking group with the most real estate on its books in Spain, was nationalized, today the Spanish government rolled out a number of provisions for banks, all of which are not easily digestible in the first gulp. While the measures show directional progress, the future findings of assets as risk (which are highly tied to real estate prices that we think could have another -30% leg down) could well be considerably larger than the €184 billion of assets which the Bank of Spain terms “problematic.”


The main points, according to Economy Minister Luis de Guindos’ speech today, include:

  • Spain will force banks to increase provisions against real estate loans by about €30 billion ($38 billion)
  • Spain will hire two auditors to value Spanish lenders’ assets
  • Banks will have to raise provisions on real estate loans that are still performing to 30% from 7% on average and the government will provide funds for those that need support
  • The state will inject less than €15 billion into struggling banks, and the funds won’t add to the budget deficit, according to Luis de Guindos
  • The government will also force all banks to move foreclosed real estate assets off their balance sheets into independently managed companies so they can be sold
  • Spain will boost provisioning on still-good land assets to 52% from the 7% level set for all types of real estate risk in February
  • Spain will raise the coverage level on loans linked to unfinished buildings to 29% and to 14% for finished homes and it will raise coverage for real estate assets to 45%
    • De Guindos said banks will have a month from today to say how they will meet the provisioning requirements, which come on top of the €53.8 billion of charges and capital ordered by the government in the previous cleanup effort in February
    • The state will step in through its bank rescue fund, known as FROB, to buy shares or contingent convertible bonds of banks that struggle to meet the requirements. Under the program, which Luis de Guindos said will be profitable for the government, banks that borrow will have to pay 10% interest and repay the aid within five years


In other news, the European Commission today estimated that Spain will have a budget deficit of 6.4% of GDP in 2012 and 6.3% in 2013 versus Spain’s pledge to bring its budget deficit down to 5.3% this year from 8.5% in 2011. It has also said that it will hit the EU-mandated 3% deficit target in 2013. The Commission also now expects Spain's economy to contract 1.8% this year versus its February estimate of a 1% contraction. While the Spanish government expects the economy will grow in 2013, the Commission forecast that it would still contract by another 0.3%.


The key point here to mention is the changing goal posts that the European Commission will have to make for Spain’s deficit consolidation, a case which may be mimicked across the periphery. All in, our point is that an additional bailout for Spain seems highly probable over the next months as we underweight the ability of the Spanish government to internally clean up its banks, create jobs for the some 24.4% unemployed (52% for youths), reduce its deficit, and grow the economy.



Call Outs:

European Commission:  forecasts 2012 Eurozone GDP to fall by -0.3% (unchanged from prior estimate) and return to growth of 1.0% in 2013. The report said Greek GDP should decline -4.7% this year and may stay unchanged in 2013; Italy will fall -1.4% this year and Portugal should contract -3.3% before both return to growth next year. It sees Spain’s economy shrinking by -1.8% this year and -0.3% in 2013. The report also Germany should grow at 0.7% this year and raised its out to1.7% next year; that France could miss its deficit target in 2013; and the Eurozone unemployment rate will probably average 11% this year, up from 10.2% in 2011.


Eurozone:  Eurogroup head Jean-Claude Juncker talking to broadcaster ZDF made it clear to French president-elect Francois Hollande that fiscal compact could not be renegotiated. However, he added that the while the treaty cannot be reopened, it is possible to add growth measures, something that is already under discussion.


France:  Fitch Ratings says that it will not comment on France’s AAA rating before 2013.


Germany: SEB Asset Management will liquidate its €6 Billion ImmoInvest portfolio, the largest German property mutual fund to be dissolved after failing to meet investor withdrawals. Several real-estate mutual funds, including funds owned by Credit Suisse Group AG and UBS AG, face deadlines this year to reopen or liquidate, according to Germany’s financial trade group, Bundesverband Investment and Asset Management.


IMF may limit lending to Europe: The Dow Jones, citing people familiar with the situation, reported that the IMF is drafting plans to protect it from potential lending losses, including proposals that could limit the size of loans to Eurozone countries. The article said that the proposals are being developed as the political turnover in Europe and growing austerity backlash has triggered concerns about another flare-up of the sovereign debt crisis. It added that another safeguard under consideration is the sequencing of procuring IMF funds, meaning that if Europe's recent $200B contribution is used for Eurozone loans before other countries' contributions, then Europe bears the risk if something goes wrong.


More than 50% predict euro exit: Bloomberg, citing its own global poll, reported that 57% of the 1,253 investors, analysts and traders surveyed said at least one country would exit the euro by year-end, up from 11% in January 2011. It added that 80% expected more trouble for Europe's bond markets. Highlighting contagion concerns, the article also pointed out that 47% said Spain is likely to default, the most since the survey started measuring this possibility in June 2010 and almost double the level from four months ago.


China's sovereign wealth fund says it has stopped buying European debt:  Bloomberg cited comments from China Investment Corp. President Gao Xiqing, who said that the sovereign wealth fund has stopped buying European government debt given the economic crisis on the continent. However, he added that the fund still has people looking for opportunities in Europe.


CDS Risk Monitor:


Week-over-week CDS was up across the main countries we track.  Portugal saw the largest gain in CDS w/w, +66bps to 1075bps, followed by Spain +39bps to 514bps, Ireland +28bps to 593bps, and Italy +19bps to 456bps.   


Weekly European Monitor: Moving the Goalposts, Again! - 11. CDS REAL A


Weekly European Monitor: Moving the Goalposts, Again! - 11. CDS A


Data Dump:

Eurozone Sentix Investor Confidence -24.5 MAY vs -14.7 APR


Germany CPI 2.2% APR Y/Y Final (UNCH)

Germany Exports 0.9% MAR M/M (exp -0.5%) vs 1.5% FEB

Germany Imports 1.2% MAR M/M (exp. 1.0%) vs 3.6% FEB

Germany Current Acct 19.8B EUR MAR (exp.18B) vs 11.7B EUR FEB

Germany Trade Balance 17.4B EUR MAR (exp. 14.3B) vs 14.9B EUR FEB

Germany Factory Orders -1.3% MAR Y/Y (exp. -2.8%) vs -6.0% FEB  [2.2% MAR M/M (exp. 0.5%) vs 0.6% FEB]

Germany Industrial Production 1.6% MAR Y/Y (exp. -1.2%) vs 0.0% FEB


Spain Industrial Output -10.4% MAR Y/Y vs -3.2% FEB   [workday adjusted y/y worse than expected (-7.5% versus estimate -5.3%) ]

Spain House Transactions -22.7% MAR Y/Y vs -31.8% FEB

Spain CPI 2.0% APR Y/Y Final (UNCH)

Italy Industrial Production NSA -5.9% MAR Y/Y vs -3.3% FEB


Greece CPI 1.5% APR Y/Y (exp. 1.3%) vs 1.4% MAR

Greece Industrial Production -8.5% MAR Y/Y vs -8.3% FEB

Greece Unemployment Rate 21.7% FEB vs 21.8% JAN


France Bank of France Business Sentiment 95 APR (exp. 95) vs 95 MAR

France Industrial Production -0.9% MAR Y/Y (exp. -1.3%) vs -1.4% FEB

France Manufacturing Production -0.3% MAR Y/Y (exp. -2.8%) vs -3.2% FEB


UK Industrial Production -2.6% MAR Y/Y (exp. -2.6%) vs -2.3% FEB

UK Manufacturing Production -0.9% MAR Y/Y (exp. -1.3%) vs -1.5% FEB

UK PPI Input -1.5% APR M/M (exp -0.9%) vs 1.7% MAR  [1.2% APR Y/Y (exp. 2.1%) vs 5.6% MAR]

UK PPI Output 0.7% APR M/M (exp. 0.4%) vs 0.6% MAR   [3.3% APR Y/Y (exp. 2.9%) vs 3.7% MAR]


Switzerland Unemployment Rate  3.1% APR vs 3.0% MAR

Switzerland CPI -1.1% APR Y/Y vs -1.0% MAR


Netherlands CPI 2.8% APR Y/Y (exp. 2.7%) vs 2.9% MAR

Netherlands Industrial Production 0.7% MAR Y/Y vs -2.7% FEB


Sweden Industrial Production -6.5% MAR Y/Y (exp. -2.6%) vs -7.1% FEB

Sweden CPI 1.3% APR Y/Y (exp. 1.4%) vs 1.5% MAR

Norway CPI 0.3% APR Y/Y (exp. 0.5%) vs 0.8% MAR

Norway Producer Prices Incl. Oil 2.5% APR Y/Y vs 6.6% MAR

Norway Industrial Production 2.4% MAR Y/Y vs 3.1% FEB

Finland Industrial Production -5.7% MAR Y/Y (exp. -2.2%) vs -3.3% FEB


Ireland CPI 1.9% APR Y/Y (exp. 2.3%) vs 2.2% MAR

Ireland Consumer Confidence 62.5 APR vs 60.6 MAR

Portugal Industrial Sales -1.3% MAR Y/Y vs 1.1% FEB

Portugal CPI 2.9% APR Y/Y vs 3.1% MAR


Hungary Industrial Production 0.6% MAR Prelim Y/Y vs -3.5% FEB

Hungary CPI 5.7% APR Y/Y vs 5.5% MAR

Czech Republic Retail Sales -0.3% MAR (exp. 0.2%) vs 1.6% FEB

Turkey Industrial Production 2.5% MAR Y/Y vs 1.6% FEB

Romania CPI 1.8% APR Y/Y vs 2.4% MAR

Latvia Unemployment Rate 12.9% APR vs 11.7% MAR


Interest Rate Decisions:

(5/9) Poland Base Rate HIKED 25bps to 4.75%

(5/10) BOE Interest Rate Announcement UNCH 0.50% (expected)

(5/10) BOE Asset Purchase Target UNCH 325B GBP (expected)

(5/10) Norwegian Deposit Rate Announcement UNCH 1.50% (expected)



The European Week Ahead:

Monday: Mar. Eurozone Industrial Production; Apr. Germany Wholesale Price Index; Mar. France Current Account; Apr. Italy CPI - Final


Tuesday: 1Q Eurozone GDP – Advance; May Germany Zew Survey Current Situation and Economic Sentiment; 1Q Germany GDP – Preliminary; Mar. UK Trade Balance; Apr. France CPI; 1Q France GDP – Preliminary, Non-Farm Payrolls and Wages – Preliminary; 1Q Greece GDP - Preliminary


Wednesday: Apr. Eurozone 25 New Car Registrations, CPI; Mar. Eurozone Trade Balance; BoE Inflation Report; Apr. UK Claimant Count Rate, Jobless Claims Change; Mar. UK Average Weekly Earnings, ILO Unemployment; 1Q Italy GDP - Preliminary; Mar. Italy Trade Balance


Thursday: 1Q Spain GDP - Final


Friday: G8 Leaders Meet Near Washington (May 18-19); Apr. Germany Producer Prices; Mar. Spain Trade Balance; Mar. Italy Industrial Orders



Matthew Hedrick

Senior Analyst

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