No Current Positions in Europe
Asset Class Performance:
- Equities: The STOXX Europe 600 closed up +1.6% week-over-week vs +0.6% last week. Top performers: Portugal +4.5%; Spain +4.3%; Greece +3.4%; Poland +3.2%; Finland +3.1%; Czech Republic +3.0%; Italy +3.0%. Bottom performers: Romania -1.5%; Cyprus -1.2%; Russia (RTSI) -0.4%; Sweden -0.1%. [Other: France +1.8%; Germany +1.1%; UK +1.0%].
- FX: The EUR/USD is down -0.73% week-over-week vs +1.04% last week [-5.14% YTD]. W/W Divergences: NOK/EUR +1.81%; SEK/EUR +1.40%; RUB/EUR +1.21%; TRY/EUR +0.41%; HUF/EUR +0.09%; CHF/EUR +0.07%; DKK/EUR -0.01%; PLN/EUR -0.23%.
- Sovereign CDS: Sovereign CDS followed yields, down across the periphery this week. On a week-over-week basis Portugal declined the most, down -85bps to 767bps, followed by Spain -49bps to 513bps, Italy -45bps to 450bps, and Ireland -36bps to 462bps.
- Fixed Income: The 10YR yield for sovereigns across the region were mostly down this week. Greece saw the largest decrease week-over-week by -129bps to 24.35%, followed by Portugal at -95bps to 9.99%. Italy and Spain fell -21bps and -12bps to 5.88% and 6.87%, respectively. Germany gained +5bps on the week to close at 1.38%.
Germans On Deck
For a positive week of equity performance from Europe (the STOXX Europe 600 was up +1.6%) there was little material evidence of shifting policy or further clues towards programs to limit the region’s sovereign and banking risks. Interestingly, the market sold off last Thursday as Draghi did not deliver on his “whatever” promise, however seemingly the market was bullish this week on his same comments from the conference call (8/2) in which he said that the ECB “may undertake” non-standard measures, hinting at a reactivation of the SMP to buy bonds on the secondary market and a re-engagement of the EFSF to buy bonds on the primary market. There was still no hint that the SMP has been re-activated. We’ll look to data to be released on Monday for last week’s buying to see if the trend of 21 straight weeks of zero buying from the ECB has been bucked.
We’re also a bit surprised by the market’s move because as it relates to the political risk unfolding (and don’t forget many Eurocrats are on vacation this month), we’d expect more of an impasse as we wait for 12 September and Germany’s Constitutional Court ruling on the constitutionality of the ESM and Fiscal Compact. Interestingly, on Monday the German court was pressed to also rule on the constitutionality of a banking license of the ESM. Arguably this adds another hitch in the German court signing off on the ESM. If it is not passed Eurocrats are back to square one, which 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). On Thursday an important hurdle was cleared in France’s Constitutional Council ruling that the EU Fiscal Compact did not require changes to the constitution.
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 28-9 EU Summit meeting. Said shortly, there’s a lot of political runway left in tying up some of the programs expect to suspend economic reality and provide financial assistance to the periphery.
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.
12 September - Germany’s Constitutional Court rules on the constitutionality of the ESM and Fiscal Compact.
12 September - Dutch General Election
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.
October - Final discussions expected between Troika and Eurozone finance ministers to determine if Greece is eligible for €31B in new aid, including €25B to recapitalize the banking sector.
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.
Greece - S&P cuts outlook from Stable to Negative. Sees Greece likely to need additional EU/IMF funding in 2012.
UK - The Bank of England slashed its outlook for British economic growth to 0% for this year, as Eurozone "storm clouds" cast a long shadow and scars from the world's financial crisis appear deeper than previously thought.
- On Stimulus: Governor Mervyn King said there was no urgent need to print more money
- On Rate Cut: King said there’s even less of a case to cut interest rates
- CPI Forecasts: at ~1.7% in 2 years time, ~1.8% in 3 years time
- GDP Forecasts: slashes 2012 growth forecasts to 0% and +1.9% in 2013 (vs May forecast of ~+0.8% and ~+2%, respectively). King warned that the economy would grow at sub-par speed for at least the next three years
We remain highly sensitive around our trading ranges of $1.20 to $1.23. We reiterate that below $1.20 we see no material levels of support.
---We saw another week of weak data from Europe. In the charts below we highlight bombed out industrial production figures, and note that even the perceived economic stalwart of Germany has slid substantially as shown in the German Factory Orders chart.
Eurozone Sentix Investor Confidence -30.3 AUG vs -29.6% JUL
Germany Factory Orders -7.8% JUN Y/Y (exp. -7.0%) vs -5.3% MAY [-1.7% JUN M/M (exp. -0.8%) vs 0.7% MAY]
Germany Exports -1.5% JUN M/M (exp. -1.3%) vs 4.2% MAY
Germany Imports -3.0% JUN M/M (exp. -2.0%) vs 6.2% MAY
Germany Industrial Production -0.3% JUN Y/Y vs -0.3% MAY
Germany CPI FINAL 1.9% JUL Y/Y (vs prev estimate of 2.0%)
France Industrial Production -2.3% JUN Y/Y (exp. -1.8%) vs -3.7% MAY
France Manufacturing Production -2.6% JUN Y/Y (exp. -2.1%) vs -4.6% MAY
Bank of France Business Sentiment 90 JUL vs 91 JUN
UK Halifax House Price -0.6% JUL Y/Y (inline) vs -0.5% JUN [-0.6% JUL M/M (exp. -0.5%) vs 0.8%]
UK New Car Registrations 9.3% JUL Y/Y vs 3.5% JUN
UK Industrial Production -4.3% JUN Y/Y (exp. -5.3%) vs -1.8% MAY
UK Manufacturing Production -4.3% JUN Y/Y (exp. -5.7) vs -1.8% MAY
UK PPI Input 1.3% JUL M/M (exp. 1.3%) vs -2.9% JUN [-2.4% JUL Y/Y (exp. -1.5%) vs -3.0% JUN]
UK PPI Output 0.0% JUL M/M (exp. 0.0%) vs -0.6% JUN [1.7% JUL Y/Y (exp. 2.0%) vs 2.0% JUN]
Italy Q2 GDP Preliminary -0.7% Q/Q (exp. -0.8%) vs -0.8% in Q1 [-2.5% Y/Y (exp. -2.5%) vs -1.4% in Q1]
Italy Industrial Production -8.2% JUN Y/Y vs -6.6% MAY
Italy CPI FINAL 3.6% JUL Y/Y (prev. est. 3.7%)
Spain Industrial Output NSA -6.9% JUN Y/Y vs -5.7% MAY
Spain Housing Transactions -11.4% JUN Y/Y vs -11.6% MAY
Portugal Industrial Sales -3.2% JUN Y/Y vs -1.1% MAY
Portugal CPI 2.8% JUL Y/Y vs 2.7% JUN
Portugal Construction Works Index 55.4 JUN vs 59.3 MAY
Switzerland Unemployment Rate 2.9% JUL vs 2.9% JUN
Switzerland CPI -0.8% JUL Y/Y vs -1.2% JUN
Netherlands Industrial Production -2.4% JUN Y/Y vs 0.0% MAY
Netherlands CPI 2.6% JUL Y/Y vs 2.5% JUN
Austria Wholesale Price Index 1.2% JUL Y/Y vs 0.2% JUN
Norway Industrial Production 7.7% JUN Y/Y vs 13% MAY
Norway CPI including oil -0.6% JUL Y/Y vs -0.2% JUN
Finland Industrial Production -1.0% JUN Y/Y vs -1.4% MAY
Denmark CPI 2.1% JUL Y/Y vs 2.2% JUN
Ireland CPI 2.0% JUL Y/Y vs 1.9% JUN
Ireland Consumer Confidence 67.7 JUL vs 62.3 JUN
Ireland Industrial Production 9.2% JUN Y/Y vs 4.6% MAY
Greece CPI 1.3% JUL Y/Y vs 1.3% JUN
Greece Unemployment Rate 23.1% MAY vs 22.5% APR
Czech Republic Unemployment Rate 8.3% JUL vs 8.1% JUN
Czech Republic CPI 3.1% JUL Y/Y vs 3.5% JUN
Hungary Industrial Production 0.6% JUN Y/Y vs 2.4% MAY
Bulgaria Industrial Production 1.5% JUN Y/Y vs 0.4% MAY
Latvia Q2 GDP Preliminary 1.0% Q/Q vs 1.0% in Q1 [5.1% Y/Y vs 6.8% in Q1]
Turkey Industrial Production NSA 2.7% JUN Y/Y vs 5.9% MAY
Interest Rate Decisions:
(8/9) Serbia Repo Rate HIKED 25bps to 10.50%
The Week Ahead:
Monday – Jul. Germany Wholesale Price Index; UK Jul. RICS House Price Balance; Italy Jun. General Government Debt; 2Q Greece GDP - Advance
Tuesday – Aug. Eurozone ZEW Survey Economic Sentiment; Jun. Eurozone Industrial Production; 2Q Eurozone GDP – Advance; Aug. Germany ZEW Survey Current Situation and Economic Sentiment; 2Q Germany GDP – Preliminary; Jul. UK CPI, RPI; Jun. UK ONS House Price; Jul. France Consumer Price Index; 2Q France Gross Domestic Product – Preliminary, Non-Farm Payrolls, Wages; Jul. Spain Consumer Price Index - Final
Wednesday – UK BoE Minutes; Jul. UK Claimant Count Rate, Jobless Claims Change; Jun. UK Average Weekly Earnings, ILO Unemployment Rate,
Thursday – Jul. Eurozone CPI; Jul. UK Retail Sales; Jun. Spain Trade Balance
Friday – Jun. Eurozone Current Account, Trade Balance; Jul. Germany Producer Prices