No Current Positions in Europe
Asset Class Performance:
- Equities: The STOXX Europe 600 closed up +0.7% week-over-week vs +0.6% last week. Top performers: Denmark +2.6%; Hungary +2.0%; Norway +1.8%; Switzerland +1.7%; Netherlands +1.6%; Greece +1.5%; Germany +1.1%. Bottom performers: Spain -6.3%; Cyprus -5.4%; Italy -4.7%; Finland -0.9%.
- FX: The EUR/USD is down -0.74% week-over-week vs -0.50% last week. W/W Divergences:RUB/EUR +2.46%; SEK/EUR +2.11%; NOK/EUR +1.12%; PLN/EUR +0.49%; CHF/EUR +0.00%; DKK/EUR -0.01%; CZK/EUR -0.51%; RON/EUR -0.79%.
- Fixed Income: There was a notable break-out in the Spanish 10YR Yield this week to 7.27%!, or +61bps week-over-week. Greece rose +28bps to 25.50%, and Italy rose +9bps to 6.08%. France was a notable decliner on the week, falling -19bps to 2.03%.
There was an interesting article from Bloomberg.com yesterday discussing how Ireland’s National Asset Management Agency, the state agency set up in 2009 to “purge banks of their most toxic commercial property loans, started the destruction of an apartment block for the first time.”
According to the article, Ireland has some 1,850 housing developments that have remained unfinished since the housing bubble popped in 2008. Approximately 553,000 houses were built in the ten years through 2005, for a country of 4.5MM, and now an estimated 294,000 homes lie empty.
The bulldozing of this block and many more like it is an important step for Ireland and shows a willingness to start over. Getting an economy to a “start-over” spot includes in some cases destroying excess housing supply, but also embracing a level of austerity to reduce fiscal imbalances to healthier levels off which economies can begin to grow again. We’re not saying this process is easy or short, clearly the drag could have generational impacts, but the markets need to clear. It appears, it’s the European politicians, in particular, that don’t want to let this happen.
Today’s conference call of Eurozone finance ministers is a prime example. The group of 17 approved an initial €30 Billion (of the total €100 Billion originally proposed) to recapitalize Spanish lenders, following key parliamentary approvals this week by Germany and Finland. Once again Eurocrats showed their willingness to issue yet another bailout band-aid, to deflect near-term pressures (and save their jobs) but neglect construction of a longer term roadmap. Spain’s banking loans will come initially from the remaining EFSF, with support by the ESM if Germany signs off on its terms in September, and will be directed at Spain’s Fund for Orderly Bank Restructuring (FOBR) by the end of the month.
Socialist policy makers of the world unite!? Well if today’s European equity market performance is any indication – indices were down between -1 and -5% on the day and the EUR/USD cross is trading down -1% at $1.2160 – it’s a reflection of investors’ fears that Europe does not have a credible path forward to grow GDP and eventually exit the years of this sovereign debt and banking crisis.
The cross broke through out intermediate term TREND line of $1.22. We’ll be monitoring this cross acutely. Our immediate term TRADE range is $1.21 to $1.23.
Spain - German Finance Minister Schaeuble told the Rheinische Post newspaper that Spain's government, not its banks, will be liable for the bailout of up to €100B of the Spanish banking sector.
Spain - May revise its GDP estimate for 2013 to reflect a contraction of 0.2% to 0.4% vs its previous forecast for growth of 0.2%.
Italy - Italian Prime Minister Monti expressed serious concern over a potential default by Sicily, which accounts for ~5.5% of Italy's GDP. Monti said in a statement that there were "grave concerns" that the autonomous region could default and noted that he had written to the governor Raffaele Lombardo seeking confirmation that he would resign by the end of the month.
Germany - A monthly survey of funds by Bank of America Merrill Lynch showed that a net 32% of money managers expect trouble in Germany, a sharp reversal since May. Worries may be linked to the Bundesbank's soaring claims (which now stand at €729B) on Eurozone central banks under the ECB’s “Target2” payment system.
Eurobonds/bills - Sharon Bowles, chairwoman of the European Parliament's Committee on Economic and Monetary Affairs, said that Eurobills have a better political chance than Eurobonds. She noted that "They are the most likely," adding that "There are a lot of people who believe they are possible and they would also pass muster under the German constitutional court," a major stumbling block for EU legislation.
Pan-European deposit protection scheme - Sharon Bowles, chairwoman of the European Parliament's Committee on Economic and Monetary Affairs, said that a pan-European deposit protection scheme is unlikely to gain political traction over the near-term due to limited funding availability. She noted that many member-state deposit guarantee funds are only funded after they are needed, adding that most are bankrupt due to recent bailout activity. She also pointed out that more than €10T in total deposits that would have to be insured dwarfs the €700B in ESM firepower.
Italy - The Italian lower house voted on Thursday to approve the ESM, the euro zone's new bailout fund, giving final parliamentary clearance after a vote in the Senate last week.
Sovereign CDS rose across the peripheral countries this week. On a week-over-week basis Spain rose the most, up +26bps to 594bps, followed by Ireland +11bps to 562bps and Italy (+10bps) to 515bps. Germany saw the largest decline (-12bps) to 75bps, followed by Portugal (-8bps) to 827bps. Both France and the UK fell -5bps on the week, to 168bps and 61bps, respectively.
Eurozone ZEW Economic Sentiment -22.3 JUL vs -20.1 JUN
EU-27 New Car Registrations -2.8% JUN Y/Y vs -8.7% MAY
Eurozone CPI 2.4% JUN Y/Y vs 2.4% MAY
Eurozone May Current Account +€10.9B vs prior revised +€5.5B from +€4.6B
Eurozone Construction Output -8.4% MAY Y/Y vs -6.3% APR [0.1% MAY M/M vs -3.7% APR]
Germany ZEW Current Situation 21.1 JUL (exp. 30) vs 33.2 JUN
Germany ZEW Economic Sentiment -19.6 JUL (exp. -20) vs -16.9 JUN
Germany Producer Prices 1.6% JUN Y/Y (exp. 1.8%) vs 2.1% MAY
UK CPI 2.4% JUN Y/Y = lowest level in 2.5 years (exp. 2.8%) vs 2.8% MAY [-0.4% JUN M/M (exp. -0.1%) vs -0.1% MAY]
UK Retail Price Index 2.8% JUN Y/Y (exp. 3%) vs 3.1% MAY
UK Bank of England votes 7-2 to increase Asset Purchases
UK ILO Unemployment Rate 8.1% MAY vs 8.2% APR
UK Jobless Claims Change 6.1K JUN (exp. 5K) vs 6.9K MAY
UK Retail Sales w/ Auto Fuel 1.6% JUN Y/Y (exp. 2.3%) vs 2.1% MAY
UK Public Sector Net Borrowing 12.1B GBP JUN (exp. 11.2B) vs 16.1B GBP MAY
Italy Industrial Orders -9.4% MAY Y/Y vs -12.3% APR
Spain House Price Index -8.3% in Q2 Y/Y vs -7.2% in Q1 [-2.5% in Q2 Q/Q vs -3.0%]
Portugal Producer Prices 2.7% JUN Y/Y vs 3.2% MAY
Switzerland Credit Suisse ZEW Survey of Economic Sentiment -42.5 JUL vs -43.4 JUN
Switzerland Industrial Production 1.4% in Q1 Y/Y vs 3.6% in Q4
Switzerland Exports -2.6% JUN Y/Y (exp. -1.5%) vs 1.3% MAY
Switzerland Imports -3.1% JUN Y/Y vs 0.9% MAY
Netherlands Consumer Confidence -32 JUL vs -40 JUN
Netherlands Unemployment Rate 6.3% JUN vs 6.2% MAY
Netherlands Consumer Spending -1.9% MAY Y/Y vs -2.1% APR
Ireland PPI 3.2% JUN Y/Y vs 2.0% MAY
Slovenia Unemployment Rate 11.6% MAY vs 11.8% APR
Slovakia CPI 3.7% JUN Y/Y vs 3.4% MAY
Slovakia Unemployment Rate 13.3% JUN vs 13.2 MAY
Turkey Consumer Confidence 91.8 JUN vs 92.1 MAY
Turkey Unemployment Rate 9.0% APR vs 9.9% MAR
ZEW Eastern Europe Economic Survey:
Interest Rate Decisions:
(7/19) Turkey Benchmark Repo Rate UNCH at 5.75%
The Week Ahead:
Monday: Jul. Eurozone Consumer Confidence – Advance; May Mortgages - Capital Loaned; Mortgages on Houses
Tuesday: Jul. Eurozone PMI Composite, Services, and Manufacturing – Advance; Jul. Germany PMI Services and Manufacturing - Advance; Jun. Germany Import Price Index (Jul. 24-30); Jun. UK BBA Loans for House Purchase; Jul. France PMI Services and Manufacturing – Preliminary, Own-Company Production Outlook, Production Outlook Indicator, Business Confidence Indicator; Jun. Spain Producer Prices
Wednesday: Germany IFO Business Climate, Current Assessment, and Expectations; Jul. UK CBI Trends of Total Selling, Trends of Selling Prices, and Business Optimism; 2Q UK GDP – Advance; May UK Index of Services; Jul. France Business Survey Overall Demand; Jun. France Jobseekers; Jul. Italy Consumer Confidence Indicator
Thursday: Jun. Eurozone Money Supply 3; Aug. Germany GfK Consumer Confidence Survey; Jun. Italy Hourly Wages; May Italy Retail Sales
Friday: Jul. Germany CPI; Jul. France Consumer Confidence Indicator; 2Q Spain Unemployment Rate; Jul. Italy Business Confidence
Extended Calendar Call-Outs:
18-19 October: Summit of EU Leaders