Positions in Europe: Short Spain (EWP); Short Spain (EWP); Long German Bunds (BUNL)
We don’t have a crystal ball when it comes to getting ahead of the massive political risk in Europe that will greatly weigh against the EUR/USD cross. That said, the most immediate catalyst for the cross is the Greek election this Sunday. We’re assigning a 60/40 probability of a victory for the pro-austerity party New Democracy. Anti-austerity Syriza party head Alexis Tsipras has been very vocal this week stressing that he wants to “keep Greece in the Eurozone and restore growth”, however based on recent opinion polls we’re still behind the opinion that Greeks identify their future “prosperity” bound with membership in the Eurozone, and not removed with the Drachma, and we think Greeks are uncertain Tsipras can deliver.
That said, we view the timing of Spain’s €100B banking credit line as incredibility inept. Leading up to Saturday’s announcement, Troika was playing a relatively strong hand of cards, positioning the vote in Greece along the lines: vote New Democracy and stay in the Eurozone, or vote Syriza and default and exit the Eurozone. Saturday’s Spanish bailout folded a number of those strategic cards and encouraged the view that Troika will remain an unconditional backstop, regardless of who wins. To this end, Syriza could make this a very tight race. Yet in our opinion the pop in Greek equities this week (+13.7% w/w) is baking in a ND win.
The first exit polls are likely to be published at 5pm GMT on Sunday with the first official projections due out a few hours later. However, we may have to wait until late Sunday night or Monday morning for conclusive results.
Either way, the winner will most likely need to form a coalition government and will get 3 days to get this accomplished. If that fails, it passes to the 2ndplace party for 3 days, and then to the 3rdplace party.
Ultimately we think the EUR/USD cross bounces on a New Democracy win and falls on a Syriza victory or any stumbles in coalition formation. That said, the wild card remains just how Eurocrats will responds on their Sunday conference call to the elections. Eurocrats, after all, can suspend gravity longer than you can remain solvent.
Keith shorted the EUR/USD today in the Hedgeye Virtual Portfolio. Our quantitative set-up for the immediate term TRADE support is $1.24 and resistance is $1.27. Our intermediate term TREND support level remains at $1.23 and resistance is $1.29. Our call is that if $1.23 breaks, look out below! And we’re not EUR parity folks because we see Eurocrats stepping in to prevent it.
The political set-up over the intermediate term TREND appears to simply be based on wait-and-see what happens in the Greek elections.
Don’t forget that Eurocrats tread slowly; it’s the market participants and the media that want a resolution from Europe yesterday. This could mean that headline risk moves the currency around, but it stays within a band between $1.23 and $1.29. As we said many times, given the constrained and conflicted nature of the Union of such uneven states under one monetary policy, Eurocrats have a long road to travel to save the region’s current fabric, if they can at all.
In a thick calendar for June we see a high likelihood that no firm policy action comes from the meetings this month. Monday starts the G20 Summit in Mexico; the Eurogroup and EcoFin meet on June 20-21; and the EU Summit convenes in Brussels on June 28-29. The main topics of discussion will include:
- Fiscal Compact
- Pan-European Deposit Insurance
- European Redemption Fund
- ESM (and EFSF)
- European Financial Transactions Tax
We continue to view Ms. Merkel as the Eurozone’s paymaster, the lead horse pulling the Eurozone cart along. We see Germany pushing the fiscal compact route, the initial building block should Germany even decide to sign off on Eurobonds or a pan-European deposit insurance facility. That said, we see agreement on a fiscal union over the near term as incredibly challenged as countries are unwilling to part with their fiscal sovereignty, which should put downside pressure in the cross.
Interestingly, there have been mixed messages on the Germans’ position regarding the potential of a €2.3T European redemption fund that would essentially take over the excess sovereign debt of all countries that exceed the EU’s Growth and Stability Pact’s 60% debt to GDP limit in exchange for stricter economic oversight. This, however, especially in its initial discussion, seems out of character for the Germans who don’t want to signal they’re taking on the bulk of Europe’s risk (debt) – even though they’re carrying the lion’s share— and it also goes against their positioning that the member countries should do more for themselves (at least initially) to sort their fiscal houses before big brother Germany or Troika has to jump in.
Again, you’ll have to trade around the rhetoric versus actions of Eurocrats on any of the six policy bullets (listed above) that will be debated in the go-forward meetings. We’ll continue to update you on this ever changing political scene and refresh our quantitative levels.