Weekly European Monitor: Hold Your Horses on Greek Exit

-- For specific questions on anything Europe, please contact me at to set up a call.


No Current European Positions in the Hedgeye Virtual Portfolio


Asset Class Performance:

  • Equities:  The STOXX Europe 600 closed up +1.5% week-over-week vs -5.2% last week. Bottom performers: Cyprus -16.4%; Greece -11.8%; Ukraine -5.1%; Turkey -3.7%; Russia (RTSI) -3.4%; Portugal -2.5%. Top performers:  Sweden +3.0%; Ireland +2.6%; Belgium +2.2%; UK +1.6%; Netherlands +1.4%; France +1.3%; Switzerland +1.2%; Germany +1.1%.  
  • FX:  The EUR/USD is down -2.01% week-over-week vs -1.18% last week.  W/W Divergences: SEK/EUR +1.70%, TRY/EUR +1.57%, NOK/EUR +1.28%, GBP/EUR +1.05%, CHF/EUR 0.00%, PLN/EUR -0.23%, RUB/EUR -0.30%, HUF/EUR -0.45%, CZK/EUR -0.52%, RON/EUR -0.73%.
  • Fixed Income:  Greece’s 10YR government bond yield saw the biggest gain, at +91bps week-over-week (vs +461bps last week!) to 30.05%.   Portugal followed at +23bps to 12.31%. France saw the largest contractions w/w, falling -32bps to 2.51%, followed by Belgium -25bps to 3.04% and Italy -14bps to 5.60%.   On a month-over-month basis, the Greek 10YR yield is up a monster +880bps!, while France fell -47bps and Germany fell -34bps over the period.

Weekly European Monitor: Hold Your Horses on Greek Exit - AA. YIELDS



“A mess is a mess is a mess”:

This phrase is how I started many discussions with clients this week pertaining to Europe.  You really have to start with the fact that the Eurozone is a compromised Union of states and you have to think like a Eurocrat to help size potential outcomes for the region. The question isn’t always what “should” happen, but what “will” happen. A few short conclusions:

  • There’s tremendous resolve from Eurocrats to keep the Union alive for their own job security
  • There’s tremendous fear of the unknown, namely the impact of an exit/default of a country and the snowball effect for the rest of the states.
  • There are a tremendous number of hurtles to clear for Europeans to collectively agree on anything (27 EU and 17 Eurozone Parliaments), so short of a massive bank-run that would call for swift action, Eurocrats are likely to continue to drag their feet and butt heads on future policy action (witness the stark divide between the fiscal conservative and anti-Eurobond Germans vs the Pro-Eurobond Italians and French).

Obviously, Greece is the direct and central lynchpin, right here and now. As we’ve made clear in previous work, including last week’s post titled “On Why Greeks Shouldn’t Leave the Eurozone/EU”, there are numerous reasons why Greece is not incentivized to leave the Union (email me at if you need a copy), and Eurocrats have signaled that bailout funds are complicit with the maintenance of austerity targets.


So Greece is essentially holding a loaded gun: on June 17th the Greeks either vote in the anti-austerity party, Syriza, which would result in the country’s exit from the Eurozone and default, or Greeks decide to “play ball” and vote for a pro-austerity party (likely a coalition party headed by New Democracy) to continue to get loan money from its sugar daddy, Troika. We’re by no means suggesting that either outcome leaves Greece in a positive position; however, returning to the incentives and behaviors of Eurocrats, along with the resolve of the Greek people (recent polls suggest 83% want to stay in the Eurozone and with the EUR) we’re attaching a high probability that Greece decides to “play ball” at the polls.


The latest poll for Athens Skai TV now has the anti-austerity Syriza moving up to a new high of 30% of votes versus New Democracy at 26% and Pasok at 15%. Of note is that New Democracy has recently formed a coalition with a splinter group, the Democratic Alliance, also known as DISY. DISY received 2.55% of the popular vote back on May 6, below the 3% threshold needed to be awarded any seats in the Greek legislature. In the opinion polls conducted since the election, they've received an average of 2.03% of the vote. Interestingly, Syriza has led New Democracy in the last 12 opinion polls by an average of 2.35%. With DISY joining New Democracy, this makes the outcome much more even, were the vote held tomorrow.


The topic of the week into and out of the EU Summit was Eurobonds.  Italian PM Monti’s comments were probably the loudest, including that “Europe can have euro bonds soon”, however we still see the Germans carrying the big stick and pulling the cart that is the Eurozone. And for now the Germans are not moving off their positioning. Whether the strong anti-Eurobond position reflects squarely its historic fiscal conservatism, or is more of a bargaining chip to encourage Greeks to continue austerity (versus completely abandoning) is a grey area.  However, what’s clear is that the more Eurocrats speak of Eurobonds, the less likely countries are to stay the path of fiscal consolidation. While we agree that consolidation targets need revision across most of the PIIGS, we view the capitulation of austerity programs across the region as decidedly negative.


There’s a lot of runway before the June 17th Greek election and the next European Summit on June 28-29. We’re of the opinion that headlines will continue to roil capital markets and that the prolonged pain that has been the uncertainty in Europe is here to stay. 




Below is an updated price level chart on the pair with our immediate term TRADE buy level at $1.25 and immediate term TRADE sell level at $1.27. Our models continue to suggest that $1.22 intermediate TREND support is in play, however we expect the next move to be UP. We use the etf FXE to trade the cross. 


Weekly European Monitor: Hold Your Horses on Greek Exit - AA. EUR



Call Outs:

OECD in its semi-annual report said Eurozone GDP is forecast to contract by 0.1% this year, before picking up to 0.9% in 2013.

The International Institute of Finance said Spanish bank loan losses could hit €260B (or €76B to cover losses on top of the €184B they are in the process of raising), with the industry likely to need some €60B in outside help to stay afloat.


Support for Merkel's CDU continues to slide: a survey by Forsa for Stern magazine is the second this week to show a substantial narrowing of the gap between Merkel's CDU and the Social Democrats (SPD). The Forsa poll showed support for the CDU falling four points to 31%, the lowest since October 2011 and down from 38% in February. Support for the SPD rose one point to 27%. However, Forsa chief Manfred Guellner said that there were no signs that Merkel's own popularity had been affected by the recent election setback in NRW.


Spain - Bankia to now ask Madrid for over €15B: Recall that Economy Minister Luis de Guindos told a congressional committee on Wednesday that the state would have to put at least €9B into Bankia.


EFSF CFO says rescue fund unlikely to directly recapitalize banks: EFSF CFO Christophe Frankel said that his fund's permanent successor, the ESM, is unlikely to be allowed to directly recapitalize banks. Recall that some Eurozone countries, along with the IMF, have pushed for this option. He also dismissed concerns that the ESM may not have enough staff and went on to note that a decision regarding the fund's leadership will be made in July.


Germany develops six-point plan for economic growth in Europe: the German government has developed a six-point plan to help promote growth in the Eurozone. The plan includes the creation of special economic zones with lower tax rates and fewer regulations to help peripheral states. It also includes an easing of labor market regulations and the creation of state agencies to sell assets.


Portugal - Opposition leader says Portugal needs more time on budget goals: Antonio Jose Seguro, the leader of the opposition Socialists, said that Portugal will need at least an extra year to reduce its budget deficit to the target established under its €78B bailout. Recall that Portugal is expected to post a budget deficit of 4.5% of GDP this year, while it must be cut to 3% by 2013. While Seguro criticized the strength and pace at which austerity measures are being implemented in Portugal, he also said that he did not believe that the country would need additional bailout funds. He also highlighted his support for Eurobonds and changing the statutes of the ECB to boost its lending to troubled countries.


CDS Risk Monitor:


Week-over-week CDS were mixed across the main countries we track.  Ireland saw the largest gain in CDS w/w at +24bps to 707bps, followed by Portugal +11bps to 1195bps. The biggest declines came from Spain -17bps to 536bps, France -15bps to 204bps, and Italy -9bps to 508bps.  


Weekly European Monitor: Hold Your Horses on Greek Exit - AA. CDS A


Weekly European Monitor: Hold Your Horses on Greek Exit - AA. CDS B


Data Dump:

PMI Manufacturing

Eurozone 45 MAY (exp. 46) vs 45.9 APR

Germany 45 MAY (exp. 46.8) vs 46.2 APR

France 44.4 MAY (exp. 47) vs 46.9 APR


PMI Services

Eurozone 46.5 MAY (exp. 46.7) vs 46.9 APR

Germany 52.2 MAY (exp. 52) vs 52.2 APR

France 45.2 MAY (exp. 45.7) vs 45.2 APR


Eurozone PMI Composite: 45.9 MAY (exp. 46.6) vs 46.7 APR

Eurozone Construction Output -3.8% MAR Y/Y vs -16.3% FEB   [12.4% MAR M/M vs -10.4% FEB]


Germany IFO Business Climate 106.9 MAY (exp. 109.4) vs 109.9 APR

Germany IFO Current Assessment 113.3 MAY (exp. 117.1) vs 117.5 APR

Germany IFO Expectations 100.9 MAY (exp. 102) vs 102.7 APR

Germany GfK Consumer Confidence Survey 5.7 JUN (exp. 5.6) vs 5.7 MAY


Germany Q1 GDP Final 1.2% Y/Y and 0.5% Q/Q [UNCH vs previous estimate]

  • Private Consumption 0.4% vs -0.2% in Q4
  • Exports 1.7% vs -1.5% in Q4
  • Imports 0.0% vs -0.8% in Q4
  • Construction Investment -1.3% vs 1.9% in Q4
  • Government Spending 0.2% vs 0.6% in Q4
  • Capital Investment -1.1% vs 1.1% in Q4
  • Domestic Demand -0.3% vs 0.2% in Q4

France Consumer Confidence 90 MAY (exp. 88) vs 89 APR

France Own-Company Production Outlook -4 MAY vs -5 APR

France Production Outlook Indicator -29 MAY vs -14 APR

France Business Confidence Indicator 93 MAY vs 95 APR


UK Bank of England: The nine members of the Bank's Monetary Policy Committee voted 8-1 in favor of ending the asset purchases at a total of £325B, with only David Miles keeping up his call for another £25B dose of quantitative easing.

UK Retail Sales -1.1% APR Y/Y (exp. 1.0) vs 3.1% MAR   [-2.3% APR M/M (exp. -0.8%) vs 2% MAR]


UK RPI 3.5% APR Y/Y vs 3.6% MAR

UK CPI 3.0% APR Y/Y (exp. 3.15) vs 3.5% MAR


UK 1Q GDP Preliminary -0.1% Y/Y (exp. 0.0%) vs Initial estimate of 0.0%  [-0.3% M/M (exp. -0.2%) vs Initial estimate of -0.2%]

  • Private Consumption 0.1% Y/Y (exp. 0.3%) vs 0.4% in Q4
  • Government Spending 1.6% Y/y (exp. 0.0%) vs 0.5% in Q4
  • Gross Fixed Capital Formation -0.3% Y/Y (exp. -0.5%) vs -0.6% in Q4
  • Exports 0.1% Y/Y (exp. -0.3%) vs 1.6% in Q4
  • Imports 0.4% Y/Y (exp. 0.1%) vs 0.9% in Q4
  • Total Business Investment 14.2% Y/Y (exp. 9.2%) vs 1.6% in Q4


Italy Consumer Confidence 86.5 MAY (exp. 89.5) vs 88.8 ARP

Italy Retail Sales 1.7% MAR Y/Y vs 0.5%

Italy Hourly Wages 1.4% APR Y/Y vs 1.2% MAR


Spain Producer Prices 3.1% APR Y/Y vs 4.5% MAR

Spain Mortgages on Houses -42% MAR vs -47.1% FEB


Ireland PPI 2.8% APR Y/Y vs 2.6% MAR

Ireland Property Prices -16.4% APR Y/Y vs -16.3% MAR


Switzerland Exports -0.9% APR M/M vs -2.4% MAR

Switzerland Imports 2.6% APR M/M vs 5.9% MAR

Austria Industrial Production 0.8% MAR Y/Y vs -0.2% FEB


Finland Unemployment Rate 8.4% APR vs 8.5% MAR

Norway 1Q GDP (Mainland) 1.1% Q/Q vs 0.8% in Q4

Sweden Unemployment Rate 7.8% APR vs 7.7% MAR


Slovakia Unemployment Rate 13.4 APR vs 13.7% MAR

Poland Unemployment Rate 12.9% APR vs 13.3% MAR

Poland Retail Sales 5.5% APR (exp. 9.3%) vs 10.7% MAR

Turkey Foreign Tourist Arrivals -5.3% APR Y/Y vs -9.7% MAR


Interest Rate Decisions:

(5/25) Latvia Refinancing Rate UNCH at 3.50%



The Week Ahead:


Monday: May UK Nationwide House Prices; May Italy Business Confidence

Tuesday: May Germany CPI; Apr. UK Import Price Index (May 29-30); May UK CBI Reported Sales; Apr. Spain Retail Sales, Budget Balance YtD

Wednesday: May Eurozone Consumer Confidence – Final, Business Climate Indicator, Economic Confidence, Industrial Confidence, Services Confidence; Apr. Eurozone M3 Money Supply; Apr. Germany Retail Sales; May UK GfK Consumer Confidence Survey; Apr. UK Net Consumer Credit, Net Lending Sec. on Dwellings, Mortgage Approvals, M4 Money Supply; Apr. France Jobseekers; May Spain CPI – Preliminary; Apr. Italy PPI


Thursday: May Eurozone CPI Estimate; May Germany Unemployment Data; Apr. France Producer Prices, Consumer Spending; Mar. Spain Housing Permits, Current Account; May Italy CPI – Preliminary; Mar. Greece Retail Sales


Friday: May Eurozone PMI Manufacturing - Final; Apr. Eurozone Unemployment Rate; May Germany PMI Manufacturing – Final; May UK PMI Manufacturing; May France PMI Manufacturing – Final; Spain PMI Manufacturing; May Italy PMI Manufacturing, New Car Registration, Budget Balance; Apr. Italy Unemployment Rate - Preliminary; 1Q Italy Unemployment Rate; Greece PMI Manufacturing


Extended Calendar Call-Outs:


29 May: Meeting of General Affairs Council (GAC)


31 May: Ireland – compromise may be reached by the time Irish voters make their judgment on the treaty in a referendum


10 June: France – first round of parliamentary elections


17 June: Greece – probable date for next general election, France – second round of parliamentary election


28-29 June: EC meets to discuss Institutional Affairs, Summit of EU leaders, aim to formally sign off on growth proposals


30 June:  Deadline for EU Banks to meet €106B capital target/the 9% Tier 1 capital ratio, Iceland – Presidential election


1 July:  ESM to come into force


5 July: ECB governing council meeting


19 July: ECB governing council meeting


18-19 October: Summit of EU Leaders



Matthew Hedrick

Senior Analyst

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