No Current European Positions in the Hedgeye Virtual Portfolio
Asset Class Performance:
- Equities: The STOXX Europe 600 closed down -3.05% week-over-week vs +1.5% last week. Bottom performers: Spain -7.3%; Romania -6.4%; Finland -5.0%; Germany -4.6%; Denmark -4.6%; Portugal -4.1%; Austria -3.7%. Top performers: Greece +3.4%; MICEX +1.4%; Poland +1.2%; Hungary +0.3%.
- FX: The EUR/USD is down -0.83% week-over-week vs -2.01% last week. W/W Divergences: RUB/EUR -4.12%, HUF/EUR -1.74%, CZK/EUR -1.56%, GBP/EUR -1.24%, NOK/EUR -1.06%, PLN/EUR -0.93%.
- Fixed Income: Another crazy week of swings in yields. Germany hit record lows on the 10YR at 1.17%!!! Greece’s 10YR climbed for yet another week (big surprise!), gaining +17bps week-over-week to 30.69%. Portugal gained +5bps to 11.98%. Belgium saw the biggest weekly decline at -17bps to 2.82%, followed by France -12bps to 2.26% and Italy -12bps to 5.74%, as Germany dropped -11bps. On a month-over-month basis, the Greek 10YR yield is up a monster +1038bps!, while France fell -71bps and Germany fell -49bps over the period.
He said, She said:
In recent weeks we’ve worked hard to contextualize the ever-changing and moving parts in Europe under the assumption that to size up potential outcomes for Europe one must recognize that what Eurocrats “should” do (from a economic policy perspective) may be very different from what they “will” do. We’d direct you to our recent European Monitors titled “On Why Greeks Shouldn’t Leave the Eurozone/EU” on 5/18 and “Hold Your Horses on Greek Exit” on 5/25 for our thinking on the larger issues surrounding a Greek exit. [Email me at if you need a copy].
Our main update for this week is to stress that we believe much hinges on the Greek elections on June 17th. [Note that our EUR/USD is updated below]. Given the runway until then, we expect more stoking of the rumor mill, plenty of political foot in mouth syndrome, and market swings over even the slightest of comments from key Eurocrats. We see—short of an overnight Greek bank-run—a strong likelihood that no concrete proposals (either Eurobonds, a Pan-European Deposit Guarantee facility, and/or another LTRO) will be issued before elections. We expect Eurocrats, directed by German Chancellor Merkel, to play the card that while fiscal consolidation targets may be grossly ambitious, an all-out rejection of austerity from a government is an unacceptable position, especially for a country like Greece that is receiving bailout money conditional to its austerity program. Therefore, the call is being put to the Greeks to vote in a pro-austerity party (likely a coalition of New Democracy) versus the anti-austerity camp of Syriza.
The latest collection of Greek party polls show a mixed picture, largely showing a single digit spread with both Syriza and New Democracy receiving the favor based on the poll. This mismatch is maybe best demonstrated by a poll out today from Kathimerini showing Syriza garnering 31.5% of the vote if held today versus 25.5% for New Democracy; however the poll also noted that 58% believe New Democracy will come in first and only 34% see Syriza winning. Go figure!
Importantly, it’s worth noting that the last Greek opinion poll will be this Sunday, June 3rd, and therefore we’ll largely be in the dark from a sentiment polling perspective ahead of June 17th.
As Greece remains in the crosshairs over the next weeks, we expect talks to heat up on the ESM, the €500B bailout packages expected to come online on July 1stand work in concert with the remaining EFSF, and in particular to discuss adding clauses that explicitly define how it can be used to recapitalize European banks.
Meanwhile, we saw quite a week of weak data, namely in mostly bombed out PMI Manufacturing figures in MAY vs APR; weaker confidence figures across the region; Eurozone unemployment elevating to a 17 year high of 11.0%. One bright spot was CPI, which came in 20bps lower at 2.4% in May Y/Y versus 2.6% in April. (See the Data Dump section below for more).
Below is an updated EUR/USD price level chart. Our immediate term TRADE and intermediate term TREND levels of support are both at $1.22. Our TRADE resistance level is $1.25. Our call remains that if $1.22 breaks, look out below! We’re not EUR parity folks because we see Eurocrats stepping in to prevent it, however the runway of uncertainty until June 17thelections puts significant downside risk in play. However, we’re well cognizant that the pair could see a bounce on any optimism around discussions concerning any number of proposals on the table, including: Eurobonds, a Pan-European Deposit Guarantee facility, another LTRO, and the ESM.
Finland anti Eurobonds - Finnish Prime Minister Jyrki Katainen said in a speech that he was against taking on a bigger financial burden to help address the sovereign debt crisis in Europe. He noted that the government's stance on Eurobonds has been "extremely critical or negative".
Irish say Yes - Ireland approves the Fiscal Compact by a vote of 60.2% to 39.8%.
ECB and LTRO - ECB Governing Council member Ignazio Visco said that the central bank has not ruled out a third longer-term refinancing operation. However, he added that another LTRO is not necessary at the moment given that there is no liquidity problem. Visco, like ECB President Draghi, also argued that the ESM should be allowed to directly recapitalize troubled banks.
Greece - Euler Hermes, the world’s biggest credit insurer, said it will no longer cover new shipments of goods to Greece due to concerns about the country leaving the euro and customers defaulting on payments, which raises the prospect that certain goods will no longer reach Greek companies and stores. Recall Austria’s OeKB Versicherung said earlier this week that it will also drop coverage of new shipments to Greece, while Coface of France said it is only doing business with “the healthiest Greek companies.”
Rehn and Eurobonds - EU Economic and Monetary Affairs Commissioner Olli Rehn told a conference that the euro needs to be underpinned by closer cooperation between member countries to survive and prosper. However, he added that going straight to a discussion about Eurobonds would be a "false debate", as countries first need to bring budgetary policies more into line and move towards a fiscal union.
Draghi on the Eurozone - ECB President Mario Draghi urged Eurozone leaders to intensify their efforts to combat the crisis, noting that the central bank cannot fill the vacuum of the lack of action by national governments on fiscal growth, nor can it fill the vacuum of their lack of action on structural problems. On the banking front, Draghi said a banking union would need to be supervised centrally and require the introduction of a European deposit scheme and resolution fund. He also said that when it comes to recapitalizations, "it is better to err by too much in the very beginning rather than by too little
Eurozone Club Membership - The European Central Bank (ECB) has said that none of the eight countries that are supposed to join the euro are ready yet. The countries include: Bulgaria, the Czech Republic, Latvia, Lithuania, Hungary, Poland, Romania, and Sweden.
CDS Risk Monitor:
Week-over-week CDS were largely up. Spain saw the largest gain in CDS w/w at +70bps to 606bps, followed by Italy +63bps to 571bps, France +15bps to 219bps. Portugal was the sole decliner of the countries we track at -18bps to 1177bps.
Eurozone Unemployment Rate 11% APR [17 year high] vs 10.9% MAR revised to 11%
Eurozone Business Climate Indicator -0.77 MAY (exp. -0.67) vs -0.51 APR
Eurozone Consumer Confidence -19.3 MAY Final (-19.3 initial) vs -19.9 APR
Eurozone Economic Confidence 90.6 MAY (exp. 91.9) vs 92.9 APR
Eurozone Industrial Confidence -11.3 MAY (exp. -10.2) vs -9.0 APR
Eurozone Services Confidence -4.9 MAY (exp. -2.8) vs -2.4 APR
Eurozone CPI 2.4% MAY Y/Y (exp. 2.5%) vs 2.6% APR
Eurozone M3 2.5% APR Y/Y vs 3.1% MAR
Germany CPI 2.1% MAY Prelim. Y/Y (exp. 2.2%) vs 2.2% APR [-0.3% MAY Prelim. M/M (exp. 0.0%) vs 0.1%]
Germany Unemployment Rate 6.7% MAY vs 6.8% APR
Germany Unemployment Chg 0K MAY vs 18K APR
Germany Retail Sales -3.8% APR Y/Y (exp. 0.3%) vs 3.2% MAR [0.6% APR M/M (exp. 0.2%) vs 1.6% MAR [sales increased for second straight month]
Germany Import Price Index 2.3% APR Y/Y (exp. 2.6%) vs 3.1% MAR [-0.5% APR M/M vs 0.7% MAR]
France Producer Prices 2.7% APR Y/Y vs 3.7% MAR
France Consumer Spending 0.4% APR Y/Y vs -1.7% MAR
UK Nationwide House Prices -0.7% MAY Y/Y vs -0.9% APR [0.3% MAY M/M (exp. 0.1%) vs -0.3% APR (1st rise in 3 months)]
UK GfK Consumer Confidence -29 MAY (exp. -32) vs -31 APR (1st positive number in 4 months)
UK M4 Money Supply -3.8% APR Y/Y vs -4.8% MAR
Italy CPI 3.5% MAY Prelim. Y/Y vs 3.7% APR
Italy Unemployment Rate 10.2% APR Prelim (highest in 12 years!!) vs 10.1% MAR
Italy PPI 2.5% APR Y/Y vs 2.8% MAR
Italy Business Confidence 86.2 MAY vs 89.1 APR
Spain Total Housing Permits -27.8% MAR Y/Y vs -36.2% FEB
Spain CPI 1.9% MAY Prelim Y/Y vs 2.0% APR
Spain Retail Sales -11.3% APR Y/Y vs -4% MAR
Switzerland Retail Sales 0.1% APR Y/Y vs 4.7% MAR
Switzerland KOF Swiss Leading Indicator 0.81 MAY (exp. 0.40) vs 0.43 APR
Switzerland Q1 GDP 0.7% Q/Q (exp. 0.0%) vs 0.5% in Q4 [2.0% Y/Y (exp. 0.7%) vs 2.0% in Q4]
Sweden Q1 GDP 1.5% Y/Y (exp. 0.9%) vs 1.0% in Q4 [0.8% Q/Q vs -1.0% in Q4]
Sweden Consumer Confidence 5.9 MAY vs 4.7 APR
Sweden Manufacturing Confidence 0 MAY vs -1 APR
Sweden Economic Tendency Survey 100.9 MAY vs 101.5 APR
Sweden Household Lending 4.8% APR Y/Y vs
Sweden Retail Sales NSA 0.8% APR Y/Y vs 4.2% MAR
Norway Manufacturing Wage Index 0.7% in Q1 Q/Q vs 1.4% in Q4
Norway Unemployment Rate 2.3% MAY vs 2.6% APR
Norway Retail Sales -3.7% APR Y/Y vs 9.6% MAR
Norway Consumer Confidence 22.4 in Q2 vs 17 in Q1
Norway Unemployment Rate 3% MAR vs 3.2% FEB
Finland Business Confidence -12 MAY vs -2 APR
Finland Consumer Confidence 12 MAY vs 10.4 APR
Denmark Q1 GDP 0.3% Q/Q (exp. 0.0%0 vs -0.2% in Q4 [0.2% Y/Y (exp. 0.2%) vs 0.4% in Q4]
Austria PPI 1.1% APR Y/Y vs 1.4% MAR
Belgium Unemployment Rate 7.4% APR vs 7.3% MAR
Belgium CPI 2.81% MAY Y/Y vs 3.18% APR
Greece Retail Sales -15.1% MAR Y/Y vs -11% FEB
Ireland Retail Sales -2.7% APR Y/Y vs -0.9% MAR
Ireland Unemployment Rate 14.3% MAY vs 14.3% APR
Portugal Retail Sales -9.0% APR Y/Y vs -4.5% MAR
Portugal Industrial Production -7.4% APR Y/Y vs -4.7% MAR
Portugal Consumer Confidence -52.6 MAY vs -53.3 APR
Portugal Economic Climate Indicator -4.6 MAY vs -4.7 APR
Hungary Economic Sentiment -24.9 MAY vs -19.3 APR
Hungary Business Confidence -14 MAY vs -9 APR
Hungary Consumer Confidence -55.9 MAY vs -48.8 APR
Interest Rate Decisions:
(5/29) Turkey Benchmark Repo Rate UNCH at 5.75%
(5/29) Hungary Base Rate UNCH at 7.00%
The Week Ahead:
Sunday: Final Opinion Polls for the Greek Election
Monday: Apr. Eurozone PPI
Tuesday: May Eurozone PMI Composite and Services - Final; Apr. Eurozone Retail Sales; May Germany PMI Services - Final; Apr. Germany Factory Orders; May UK BRC Shop Price Index, Lloyds Business Barometer; May France PMI Services – Final; Spain PMI; Italy PMI Services;1Q Finland GDP
Wednesday: ECB Interest Rate Decision; 1Q Eurozone GDP, Household Consumption, Gross Fix Cap, Government Expenditure – Preliminary; Apr. Germany Industrial Production; May UK PMI Construction, BRC Sales Like-For-Like, Halifax House Prices (June 6-8); Apr. Spain Industrial Output
Thursday: UK BoE Asset Purchase Target and Announces Rate; May UK PMI Services, Official Reserves; 1Q France Unemployment Rate; Mar. Greece Unemployment Rate
Friday: Apr. Germany Exports, Imports, Current Account, Trade Balance; May UK BoE/GfK Inflation Expectation Survey, PPI Input and Output, New Car Registrations, Consumer Price Index; 1Q UK GDP – Final; Apr. France Central Government Balance, Trade Balance; Apr. Italy Industrial Production; Apr. Greece Industrial Production
Extended Calendar Call-Outs:
JUNE: Greece to Identify 5.5% of GDP in Austerity Measures
10 June: France – first round of parliamentary elections
14 June: Eurogroup Meeting
15 June: G20 Summit of Finance Ministers
17 June: Greece – probable date for next general election, France – second round of parliamentary election
18-19 June: G20 Summit in Los Cabos, Mexico
20-21 June: Eurogroup Meeting; Ecofin Meeting in Luxembourg
22 June: Greek T-Bill Redemption for 1.3 Billion EUR
28-29 June: EU Summit in Brussels, aim to formally sign off on growth proposals; EC meets to discuss Institutional Affairs
30 June: Deadline for EU Banks to meet €106B capital target/the 9% Tier 1 capital ratio, Iceland – Presidential election
JULY: France – extraordinary session of parliament in July is due to re-draft the 2013 budget
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