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Positions in Europe: Long German Bunds (BUNL)
Asset Class Performance:
- Equities: The STOXX Europe 600 closed up +2.2% week-over-week vs +0.6% last week, in a week in which most of the move came on the Thursday/Friday rally of +2.4%. Top performers: Italy +3.9%; Switzerland +2.9%; Ukraine +2.9%; France +2.9%; UK +2.8%; Germany +2.6%; Netherlands +2.2%; Spain +2.1%; Greece +2.0%. Bottom performers: Cyprus -0.6%; Hungary -0.2%.
- FX: The EUR/USD is up +0.39% week-over-week vs +1.04% last week. W/W Divergences:SEK/EUR +1.85%; PLN/EUR +1.63%; TRY/EUR +1.56%; HUF/EUR +1.11%; NOK/EUR +0.75%; CZK/EUR +0.39%; GBP/EUR -1.08%.
- Fixed Income: The 10YR yield for sovereigns across the region were mixed this week. Greece saw the largest decrease week-over-week by -182bps to 25.64%. But more important were the moves of Spain and Italy, up +18bps and +16bps to 6.99% and 6.09%, respectively. However, risk in the bond market came down in the week for these two countries, compared to last week, when Spain hit an all-time high of 7.58%!
In the ECB press conference yesterday, President Mario Draghi directly addressed the risk of rising yields across the periphery (without directly naming Spain and Italy) and went on to announce that the ECB “may undertake” non-standard measures, hinting at a reactivation of the SMP to buy bonds on the secondary market and a reengagement of the EFSF to buy bonds on the primary market, with focus on the short end of the yield curve. No target size of buying was mentioned beyond “size adequate to reach its objective” and the details of this buying is expected to be defined in the coming weeks.
What this spells is the willingness (one again) by central authorities to manipulate the Spanish and Italian bond markets. We’ll be looking for further evidence of this buying and expect yields to make dramatic moves down alongside these expectations.
No “Whatever”
As we hit on in a note yesterday titled “No “Whatever”, No Bazooka at August ECB Presser!”, ECB President Mario Draghi did not deliver the drugs, aka the bazooka, following his statement last Thursday (7/26) that “within our mandate, the ECB is ready to do whatever it takes to preserve the euro,” adding, “believe me, it will be enough.”
We were not surprised that Draghi under-delivered. As recently as 7/27 in response to Draghi’s “whatever” comment we wrote:
“The issue here, though, is that Draghi hints at possessing some bazooka that he’s been concealing for all this time. We frankly don’t think there is one, particularly because we can’t envision what one grand bazooka would look like.“
We’re frankly disgusted with the political risk in Europe. While this is not a new development, Draghi’s mismanaged comments late last week add a further layer of disguise to Eurocrats and will continue to contribute to the extreme capital market volatility across Europe. Keith brought this point home today in his Early Look titled "Sucker Economics":
1. 745AM EST (yesterday), Spanish stocks rip to the upside, +2% on the day, after the ECB decides not to cut rates, but plenty of print, tv, and radio pundits proclaim their faith that “it’s at 830AM that we get the good stuff.”
2. 835AM EST (yesterday), Spanish stock stop going up, and fast, as pundits comb the release looking for “hints” that the ECB really is going to deliver the drugs, like Bernanke was supposed to in the day prior.
3. 1130AM EST (yesterday), Spanish stocks close down -5.2% on the day, a 7% (not a typo) intraday reversal. Pundits feel shame.
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Given this environment, we’ll work to keep you abreast of the most important calendar catalysts that we think large expectations will be built into.
Calendar Catalysts:
20 August - Greece has a payment of a €3.2B bond (held by the ECB) that matures. Payment is still being discussed.
September - Troika officials will return to Greece in September to complete their final assessment of the implementation of the bailout program. Could there be another debt restructuring?
12 September - Germany’s Constitutional Court rules on the constitutionality of the ESM and Fiscal Compact.
Late September - According to La Tribune, Moody's will evaluate the consequences of the Eurozone crisis on France's AAA rating by the end of Q3. We think a downgrade to AA is a real probability.
Mid October - There’s a possibility of a German Sovereign credit rating downgrade, especially should France be reduced by a notch beforehand.
29 & 31 October - Spain’s debt maturity schedule scares as the Treasury is bumping up against sovereign debt maturities of €20.27 of debt maturing on two days.
Much hangs on Germany’s Constitutional Court ruling on 12 September when it decides on the constitutionality of the ESM and Fiscal Compact. If Germany doesn’t pass the ESM, in particular, the ESM program is back to square one, and leaves the region further in stitch as the EFSF funding ticks down (and is massively undercapitalized to deal with potential sovereign and banking bailout needs/risks on the horizon). Please note that as of now, even if the German Court passes, there is no specific language governing the scope of the ESM, namely if it has a banking license, as the only clarity on the program is three vague paragraphs issued at the June 28-29 Summit Meeting.
Call Outs:
Germany - the Emnid poll for the Bild am Sonntag showed 51% of Germans believed that the economy would be better off without the euro, while 29% said it would be worse off, and 71% wanted Greece to leave the Eurozone if it did not live up to the conditions of its bailout package.
Germany - a survey by YouGov published in the Bild newspaper showed that only 33% of Germans still believe that Chancellor Merkel is making the right debt decisions when it comes to addressing the Eurozone sovereign debt crisis. However, a poll by ZDF-Politbarometer showed 63% of Germans backed Merkel's handling of the crisis, though a majority thought she should explain her policies better.
Spain - a Metroscopia poll published monthly in El Pais showed that support for Spanish Prime Minister Rajoy fell sharply in July after his government announced a €65B austerity package. The poll showed that if the general election was to take place now, the ruling People's Party would still win with a 30% share of the vote, though it would only retain a 5.3% advantage over the Socialist opposition, down from 15.9% in the November vote. It also showed that 80% of Spaniards now had little or no confidence in Rajoy.
Spain - Catalonia, Spain's most indebted region, said on Tuesday that it cannot pay subsidies in July to hospitals, old age homes, and other social services already hit by sharp budget cuts. A government spokeswoman said the inability to pay is due to a liquidity problem, but added that the situation is expected to normalize in September. While the government would not say how much money in grants it will not be able to pay, El Pais put the figure at €400M.
Spain - Spain's 17 semi-autonomous regions will have to comply with debt ceilings starting this year. Budget Minister Cristobal Montoro said all but four regions voted in favor of the debt limits, which average 15.6% of GDP this year and 16% in 2013. The regions had an aggregate debt-to-GDP ratio of 13.1% and a deficit of 3.3% in 2011. Several regional representatives told reporters yesterday that the new rules will force them to implement deeper budget cuts.
Italy - Italian Prime Minister Mario Monti said in an interview with Finnish daily Helsingin Sanomat that while Italy does not currently need assistance from its Eurozone partners, it may in the future need a "breathing break" from its high interest rates.
Spain - Standard & Poor's Ratings Services said Wednesday it is keeping Spain's long and short-term sovereign debt rating at BBB+/A-2 and the outlook negative.
Germany - Standard & Poor's said that it had affirmed its unsolicited 'AAA' long-term and 'A-1+' short-term sovereign credit ratings on the Federal Republic of Germany. The outlook on the long-term rating remains stable.
Slovenia - Moody's credit agency downgraded Slovenia's creditworthiness by three notches from "A2" to "Baa2," which puts the country just two steps away from junk status.
Greece - the Greek government is expected to wrap up talks with troika officials on Sunday on the €11.5B in spending cuts over the next two years. The paper said that among the subjects that Finance Minister Yannis Stournaras will discuss with the troika are where else Greece will find more than €200M in savings so that it can avoid cuts to "special" salaries in the civil service and how it can make up a shortfall in revenues that would be caused by allowing Greeks to pay their income tax in installments.
IMF - said on Thursday that the Eurozone needs a "policy game changer" to stem the contagion from the debt crisis. The fund argued in a spillover report that "despite progress in the face of constraints, the sense is that not enough has been done to stop the spread of stresses and attenuate fiscal-growth-banking feedback loops". It added that in a worst-case scenario, Eurozone output could be cut by five percentage points if policymakers did not act and the crisis worsened.
Italy - Italian Prime Minister Monti's government won a confidence vote in the Senate to speed up the passage of more than €4B in spending cuts this year. Recall that the cuts, which are in addition to the €10.5B of cuts announced in an austerity package last December, would allow Italy to push out a planned VAT increase.
Risk Monitor:
Sovereign CDS were down across the peripheral countries this week. On a week-over-week basis Ireland declined the most, down -36bps to 495bps, followed by France -18bps to 154bps, Italy -17bps to 495bps, and Spain -10bps to 562bps.
Data Dump:
Eurozone Business Climate Indicator -1.27 JUL (exp. -1.09) vs -0.95 JUN
Eurozone Consumer Confidence -21.5 JUL Final (exp. -21.6)
Eurozone Economic Confidence 87.9 JUL (exp. 88.9) vs 89.9 JUN
Eurozone Industrial Confidence -15.0 JUL (exp. -14) vs -12.8 JUN
Eurozone Services Confidence -8.5 JUL (exp. -8) vs -7.4 JUN
Eurozone Unemployment Rate 11.2% JUN vs 11.1% MAY, revised to 11.2%
Eurozone July preliminary CPI +2.4% y/y vs consensus +2.4% and prior +2.4%
Eurozone PPI 1.8% JUN Y/Y (exp. 1.9%) vs 2.3% MAY [-0.5% JUN M/M (exp. -0.4%) vs -0.5% MAY]
Eurozone Retail Sales -1.2% JUN Y/Y (exp. -1.9%) vs -0.8% MAY [0.1% JUN M/M (exp. -0.1%) vs 0.8% MAY]
Germany Retail Sales 2.9% JUN Y/Y (exp. 0.4%) vs -1.1% MAY [-0.1% M/M (exp. 0.5%) vs -0.3% MAY]
Germany Unemployment Rate 6.8% JUL vs 6.8% JUN
Germany Unemployment Chg 7K JUL vs 7K JUN
France Producer Prices 1.3% JUN /Y (exp. 2.1%) vs 2.1% MAY
France Consumer Spending 0.2% JUN Y/Y (exp. 0.4%) vs 0.5% MAY
UK GfK Consumer Confidence -29 JUL vs -29 JUN
UK Nationwide House Prices -2.6% JUL Y/Y (exp. -1.9%) vs -1.5% JUN [-0.7% JUL M/M (exp. -0.2%) vs -0.6% JUN]
UK M4 Money Supply -5.2% JUN Y/Y vs -4.1% MAY
UK PMI Construction 50.9 JUL (exp. 48.7) vs 48.2 JUN
Italy CPI 3.7% JUL Prelim Y/Y vs 3.6% JUN
Italy PPI 2.2% JUN Y/Y vs 2.3% MAY
Italy Unemployment Rate 10.8% JUN Prelim vs 10.6% MAY
Spain Q2 GDP Prelim -0.4% Q/Q (exp. -0.4%) vs -0.3% in Q1 [-1.0% y/y (exp. -1.0%) vs -0.4% in Q1]
Spain Total Housing Permits -32.6% MAY Y/Y vs -32.4% APR
Spain CPI 2.2% JUL Prelim Y/Y (exp. 1.8%) vs 1.8% JUN
Spain Retail Sales -4.3% JUN Y/Y vs -4.3% MAY
Sweden Q2 GDP Prelim 1.4% Q/Q (exp. 0.2%) vs 0.9% in Q1 [2.3% Y/Y (exp. 0.6%) vs 1.5% in Q1]
Switzerland PMI Manufacturing 48.6 JUL (exp. 47) vs 48.1 JUN
Portugal Consumer Confidence -50.4 JUL vs -51.5 JUN
Portugal Economic Climate Indicator -4.4 JUL vs -4.4 JUN
Portugal Industrial Production -4.4% JUN Y/Y vs -6.7% MAY
Portugal Retail Sales -5.2% JUN Y/Y vs -4.4% MAY
Ireland Unemployment Rate 14.8% JUL vs 14.8% JUN
Denmark Unemployment Rate 6.3% JUN vs 6.2% MAY
Belgium Unemployment Rate 7.2% JUN vs 7.1% MAY
Belgium CPI 2.32% JUL Y/Y vs 2.26% JUN
Greece Retail Sales -9.2% MAY Y/Y vs -11.4% APR
Russia Consumer Prices 5.6% JUL Y/Y (exp. 5.8%) vs 4.3% JUN
Romania Producer Prices 5.8% JUN Y/Y vs 6.7% MAY
Romania Retail Sales 4.0% JUN Y/Y vs 5.6% MAY
Turkey CPI 9.07% JUL Y/Y vs 8.87% JUN
Turkey PPI 6.13% JUL Y/Y vs 6.44% JUN
Interest Rate Decisions:
(8/2) BOE UNCH at 0.50% and Asset Purchase Program on HOLD at £375 Billion
(8/2) ECB UNCH at 0.75%
(8/2) Romania Interest Rate Announcement UNCH at 5.25%
(8/2) Czech Republic Announcement UNCH at 0.50%
The Week Ahead:
Sunday - Jul. UK Lloyds Employment Confidence
Monday - Aug. Eurozone Sentix Investor Confidence; Jul. UK BRC Sales Like-For-Like, New Car Registrations; Jul. Greece Consumer Price Index
Tuesday - Jun. Germany Factory Orders; Jul. UK NIESR GDP Estimate; Jun. UK Industrial Production, Manufacturing Production; Jun. Italy Industrial Production; 2Q Italy GDP - Preliminary
Wednesday - Jun. Germany Exports, Imports, Current Account, Trade Balance, Industrial Production; BoE Inflation Report; Jul. BoF Business Sentiment; Jun. France Trade Balance; Jun. Spain Industrial Output
Thursday - Aug. ECB Publishes Monthly Report; Jun. UK Trade Balance; Jun. Spain House Transactions; Jun. Italy Trade Balance; Jun. Greece Industrial Production; May Greece Unemployment Rate
Friday - Jul. Germany Consumer Price Index – Final; Jun. France Industrial Production, Central Government Balance, Manufacturing Production; Jul. UK PPI Input, PPI Output; Jul. Italy CPI - Final
Matthew Hedrick
Senior Analyst
