Eye on Europe: Grinding To The November Halt

Eurozone Industrial Production continues to decline

November Eurozone Industrial Production came in lower than expected today at -7.7% Y/Y versus consensus of -6.1%. We’re cognizant that a November number is stale, but the slowdown trend is clearly showing no signs of bottoming yet. The impact of the slowdown is being felt harder in some places than others, Italy reported a -12.32% Y/Y production number today for instance, and that divergence creates the possibility of discord among the EU member countries as they plot a course for recovery.

The big factors to watch remain the same:

1. The outcome of Europe’s €200 BN joint stimulus package to jump-start the economy (€50 BN of which Germany committed this week): We’ve written much about Obama’s US stimulus package over the past several weeks. The risk that Europe’s package (along with tax cuts and fiscal policy changes) will fail to increase consumer spending and create jobs sufficiently and require a second round of heavy spending. Back in October Germany and France issued bank rescue packages to the tune of €500 BN and €360 billion respectively, yet today Deutsche Bank made headlines that its Q4 ’08 loss totaled €4.8 BN and HSBC is expected to require an additional $30 BN cash infusion. Another trip to the well will be painful (particularly for EU members that have a higher cost of funding like Greece, which will likely see it’s relatively high cost of borrowing increase further in the wake of today’s ratings cut by S&P).

2. Rate Cut Impact: Tomorrow the ECB will all but certainly cut interest rates, with consensus estimating a -50bps cut, yet will this be enough to accomplish anything? Additionally as ECB interest rates change we’ll be watching its affect on the Euro-USD currency exchange. Should the Euro continue to rise against the dollar, it will put further pressure on European exports. If this should be the case you’ll see exports decline along with PPI and CPI numbers on deflationary pressures.

For all of 2009, we have been short the UK via the EWU exchange traded fund. We covered that position today. Booking gains on the short side continues to be what we do. We will look to re-short EWU on an up day.

Matthew Hedrick
Analyst