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Positions in Europe: Short EUR/USD (FXE)
Asset Class Performance:
- Equities: The STOXX Europe 600 closed down -0.7% week-over-week vs -1.8% last week. Bottom performers: Ukraine -5.2%; Russia (RTSI) -2.9%; Sweden -1.4%; Switzerland -1.4%; UK -1.1%; Finland -1.0%. Top performers: Portugal +2.5%; Spain +1.5%; Italy +1.5%; Hungary +0.7%.[Other: France -0.6%; Germany 0.0%; Greece +0.4%].
- FX: The EUR/USD is up +0.56% week-over-week. W/W Divergences: RUB/EUR -2.14%; HUF/EUR -1.90%; PLN/EUR -1.85%; TRY/EUR -1.69%; GBP/EUR -0.15%; DKK/EUR -0.04%; NOK/EUR -0.01%; CHF/EUR +0.01%.
- Fixed Income: The 10YR yield for sovereigns across the region were mostly higher this week. Spain saw the largest increase, +28bps to 6.70%, followed by France’s +14bps move to 2.19%. Italy rose +8bps to 5.79bps and Germany was up +4bps to 1.39%. Greece bucked the trend, falling -54bps to 23.43%.
- Sovereign CDS: Sovereign CDS followed yields, up slightly across the periphery this week. On a week-over-week basis Spain rose the most, up +18bps to 511bps, followed by Italy +14bps to 463bps. France, Germany, the UK, and Ireland were mostly flat on the week. Portugal showed a negative inflection of -13bps to 669bps.
Grinding Higher?
This week in Europe produced a ton of noise: it started off with Draghi announcing that he would not attend Jackson Hole and increased speculation that the ECB is considering informal, flexible yield targets on short-term peripheral sovereign debt and concluded with Bundesbank President Jens Weidmann reiterating his opposition to ECB purchases of peripheral debt and his possible resignation. In short, we see the success of targeting yields as highly doubtful. Interesting, Chancellor Merkel remains in a tight spot supporting Weidmann while understanding that she must play ball with her fellow Eurocrats and inevitably grant more bailouts and support concessions to prevent the exit of Greece and limit risk premiums across the periphery.
Keep in mind that the market is wrestling with two immediate catalysts: 1. The results of the Governing Council meeting of the ECB this coming Thursday (9/6), and 2. The decision of the German Constitutional Court on 9/12.
We think it’s unlikely that we’ll get definitive color on secondary peripheral buying at the ECB’s meeting and expect rates to be on hold until we get at least another month of data and after there’s clarity from the German Constitutional Court’s decision on the constitutionality of the ESM and Fiscal Compact; currently it looks probable that it will pass.
While sovereign yields and CDS spreads were marginally higher on a week over week basis, they remain (at least for the moment) under levels seen earlier this summer -- as recently as late July -- when Italy and Spain’s 10YR were trading north of the 6% and 7% levels, effectively the market’s freak-out level. It’s unclear whether this is a function of indecision ahead of the ECB and German Court decisions or a new-found confidence that Eurocrats will continue to throw the kitchen sink at their problems despite our view that Eurocrats have no clue on how to craft a long term path towards a united, growing Europe.
Interestingly, new issuance from Italy and Spain this week was issued at lower yields than previous auctions for similar maturities, a bullish signal. But is it sustainable? We think not so long as growth remains constrained and austerity’s tail is not fully priced in. Recent fundamental data, as we show below for this week under the section Data Dump, remains awful to challenged.
Auction Results (highlights):
Italy sold €4.0B 10YR bonds with an average yield of 5.82% vs prior 5.96%, (bid to cover 1.42 vs prior 1.29; target €3.0-4.0B).
Italy sold €9.0B 6M bills with an average yield of 1.585% vs previous 2.454% on July 27 (bid-to-cover 1.69 times vs previous 1.61).
Spain sold 3M bills at 0.946%, down from the 2.434% at the last auction in July (bid-to-cover improved to 3.4x from 2.9x).
Spain sold 6M bills at 2.026% vs 3.691% last month (bid-to-cover fell to 2.2x from 3.0x in July).
Call Outs:
Germany - German government economic adviser Lars Feld (one of Germany's five "wise men") said that a breakup of the Euro would cut up to 10% off the German economy. He added that even just a Greek exit would present significant risks.
China - Premier Wen told visiting Merkel that Spain, Italy, and Greece must take “comprehensive measures” to prevent crisis from worsening. Wen did say China is willing to invest in the European Bond Market, though on the condition of a full evaluation of risk, and said that the key to solving the crisis is to strike a balance between fiscal tightening and economic stimulus.
Netherlands - The Political backdrop in the Netherlands ahead of the 12-Sept elections: opinion surveys show that the anti-austerity Socialist Party could garner between a fifth and a quarter of the seats in parliament, beating out the pro-business Liberal Party. This could put Socialist party and its leader, Emile Roemer, in a position to form a coalition. However, forming a coalition will not be easy, as an alliance with its two natural allies, Labor and Green, would be unlikely to secure enough seats to form a government. This could spell coalition building problems over austerity plans agreed under the government in April and derail the budget targets for 2013 set by the European Commission. The Socialists also want a referendum on the new fiscal compact.
Germany - Der Spiegel reported that German Chancellor Merkel wants an EU convention to draft a new treaty for deeper Eurozone integration. The magazine said that Merkel hopes that an EU leaders' summit in December can produce a firm date for the start of the convention on a new treaty.
Spain - ECB data showed that deposits in Spanish banking institutions fell 4.7% M/M in July. However, a Bank of Spain official told Dow Jones that the number was impacted by the fact that Spanish companies typically pay taxes in July, while households tend to spend more in the summer months as they go on holiday.
Spain - ECB data showed that Spanish banks cut their government bond holdings by €7.58B to €247.2B in July, the largest monthly drop since August of last year.
Italy - Prime Minister Monti said in an interview with the Italian business daily Il sole-24 Ore that while he may seek support from the Eurozone bailout mechanism to help lower borrowing costs, he does not want Italy to be subjected to "some sort of intrusive special administration like has happened with the countries that needed aid to balance their accounts". He added that Italy is "not in that situation".
Spanish - Deposit outflows for July was €74B (2x the previous month and equal to 7% GDP).
Portugal - According to a government source, troika is considering relaxing Portugal's 2012 budget deficit target from 4.5% of GDP to slightly above 5%. The paper said that the concession is in exchange for the improvement that Portugal has shown with its external deficit, which came in below 2% in the first half of the year, below the annual 2.5% target.
Spain - Moody's expected to downgrade Spain to junk in September. Moody's put Spain on negative review in June, giving itself three months to decide whether or not to cut the sovereign debt rating to junk.
EUR/USD:
Our immediate term TRADE range for the cross is $1.23 to $1.26. In the second chart below we look at CFTC data for net contracts of Euro non-commercial positions. Interestingly, since a high in short positions in the Euro on 6/5/12 (-213.060 contracts), investors have been less bearish (and covering), moving to 41% less bearish contracts (-125.817) as of 8/21. On a 1M basis, contracts moved to 20% less bearish; 3M = 35% less bearish; and 6M = 8% less bearish.
Data Dump:
In yet another week Europe showed very weak fundamental data across most of the board. In highlight, Eurozone confidence figures broadly declined in August versus July, a similar trend that was seen with German (IFO) confidence declining for four straight months, as inflation moved higher in the Eurozone (+2.6% in August) and remained sticky and high in Italy, at 3.5%.
Eurozone Business Climate -1.21 AUG (exp. -1.30) vs -1.27 JUL
Eurozone Consumer Confidence (Final) -24.6 AUG (inline) vs -21.5 JUL
Eurozone Economic Confidence 86.1 AUG (exp. 87.5) vs 87.9 JUL
Eurozone Industrial Confidence -15.3 AUG (exp. -15.5) vs -15.1 JUL
Eurozone Services Confidence -10.8 AUG (exp. -9.0) vs -8.5 JUL
Eurozone M3 3.8% JUL Y/Y (exp. 3.2%) vs 3.1% JUN
Eurozone CPI 2.6% AUG (exp. 2.5%) vs 2.4% JUL
Eurozone Unemployment Rate 11.3% JUL vs 11.3% JUN (revised from 11.2%)
Germany Unemployment Change +9K AUG (exp. +7K) vs +9K JUL
Germany Unemployment Rate 6.8% AUG vs 6.8% JUL
Germany IFO Business Climate 102.3 AUG (exp. 102.7) vs 103.2 JUL
Germany IFO Current Assessment 111.2 AUG (exp. 110.8) vs 111.5 JUL
Germany IFO Expectations 94.2 AUG (exp. 95) vs 95.5 JUL
Germany Import Price Index 0.7% JUL M/M (exp. 0.9%) vs -1.5% JUN [1.2% JUL Y/Y (exp. 1.4%) vs 1.3% JUN]
Germany GfK Consumer Confidence 5.9 SEPT vs 5.8 AUG
Germany CPI Preliminary 2.2% AUG Y/Y (exp. 2.0%) vs 1.9% JUL
Germany Retail Sales -1.0% JUL Y/Y (exp. 0.1%) vs 3.7% JUN
France Own Company Production Outlook -6 AUG vs -9 JUL
France Production Outlook -44 AUG vs -44 JUL
France Business Confidence 90 AUG vs 89 JUL
UK M4 Money Supply -4.6% JUL Y/Y vs -5.2% JUN
UK Nationwide House Prices -0.7% AUG Y/Y (exp. -2.2%) vs -2.6% JUL
Italy Business Confidence 87.2 AUG (exp. 86.8) vs 87.1 JUL
Italy Hourly Wages 1.5% JUL Y/Y vs 1.5% JUN
Italy Retail Sales -0.5% JUN Y/Y vs -1.7% MAY
Italy Consumer Confidence 86 AUG vs 86.5 JUL
Italy Unemployment Rate 10.7% JUL Prelim. vs 10.7% JUN
Italy CPI 3.5% AUG Prelim Y/Y vs 3.6% JUL
Italy PPI 2.4% JUL Y/Y vs 2.2% JUN
Spain CPI Preliminary 2.7% AUG Y/Y (exp. 2.3%) vs 2.2% JUL
Spain final Q2 GDP -0.4% Q/Q (exp. -0.4%) and UNCH vs preliminary [-1.3% Y/Y (exp. -1.0%) and -1.0% preliminary]
Spain Mortgages on Houses -25.2% JUN Y/Y vs -30.5% MAY
Spain Retail Sales -6.9% JUL Y/Y vs -4.4% JUN
Portugal Consumer Confidence -49.2 AUG vs -50.4 JUL
Portugal Economic Climate -4.0 AUG vs -4.4 JUL
Portugal Industrial Production -0.2% JUL Y/Y vs -4.6% JUN
Portugal Retail Sales -7.9% JUL Y/Y vs -5.4% JUN
Ireland Property Prices -13.6% JUL vs -14.4% JUN
Austria PPI 0.2% JUL Y/Y vs 0.3% JUN
Belgium CPI 2.86% AUG Y/Y vs 2.32% JUL
Switzerland KOF Swiss Leading Indicator 1.57 AUG vs 1.41 JUL
Sweden Household Lending 4.4% JUL Y/Y vs 4.6% MAY
Sweden PPI -1.1% JUL Y/Y (exp. -0.6%) vs 0.2% JUN
Sweden Consumer Confidence 5.4 AUG vs 5.6 JUL
Sweden Manufacturing Confidence -9 AUG vs -3 JUL
Sweden Economic Tendency 97.1 AUG vs 95.4 JUL
Netherlands Producer Confidence -4.6 AUG vs -5.2 JUL
Netherlands Consumer Spending -0.6% JUN Y/Y (exp. -1.7%) vs -1.6% MAY
Belgium Unemployment Rate 7.2% JUL vs 7.2% JUN
Denmark Q2 GDP Preliminary -0.5% Q/Q vs 0.3% in Q1 [-0.9% Y/Y vs 0.3% in Q1]
Norway Unemployment Rate 2.6% AUG vs 2.7% JUL
Finland Business Confidence -7 AUG vs -5 JUL
Finland Consumer Confidence 0.5 AUG vs 0.1 JUL
Ireland Consumer Confidence 70 AUG vs 67.7 JUL
Ireland Retail Sales Volume -1.5% JUL Y/Y vs -6.0% JUN
Greece Retail Sales -9.6% JUN Y/Y vs -9.2% MAY
Poland Q2 GDP 0.4% Q/Q (exp. 0.5%) vs 0.6% in Q1 [2.4% Y/Y (exp. 2.9%) vs 3.5% in Q1]
Hungary Unemployment Rate 10.5% JUL vs 10.9% JUN
Hungary Producer Prices 6.2% JUL Y/Y vs 6.9% JUN
Slovakia Consumer Confidence -25.9 AUG vs -23.0 JUL
Slovakia Industrial Confidence -4.7 AUG vs -6.7 JUL
Slovakia PPI 3.6% JUL Y/Y vs 4.0% JUN
Turkey Tourist Arrivals -0.6% JUL Y/Y vs 2.7% JUN
Interest Rate Decisions:
(8/28) Hungary Base Rate Announcement CUT 25bps to 6.75%
(8/29) Norway Deposit Rates UNCH at 1.50%
The Week Ahead:
Monday: Aug. Eurozone, Germany and France PMI Manufacturing – Final; Aug. UK PMI Manufacturing; Spain and Greece Manufacturing PMI; Aug. Italy PMI Manufacturing, New Car Registrations, and Budget Balance
Tuesday: Jul. Eurozone PPI; Aug. UK PMI Construction, BRC Shop Price Index; Aug. Spain Unemployment
Wednesday: Aug. Eurozone PMI Composite and Services - Final; Jul. Eurozone Retail Sales; Aug. Germany PMI Services – Final; Aug. UK. PMI Services, Official Reserves; Aug. France PMI Services – Final; Spain Services PMI; Aug. Italy PMI Services
Thursday: Governing Council meeting of the ECB in Frankfurt; ECB Announces Interest Rates; 2Q Eurozone Household Consumption Expenditures, Gross Fixed Capital Formation, Government Expenditures, GDP – Preliminary; Jul. Germany Factory Orders; BoE Announces Rates; BoE Asset Purchase Target; Aug. UK New Car Registrations; 2Q France Unemployment Rate; Jun. Greece Unemployment
Friday: Aug. Germany Wholesale Price Index (Sept. 7-12); Jul. Germany Exports, Imports, Current Account, Trade Balance, Industrial Production; 2Q Germany Labor Costs Workday and Season 1Q Labor Costs to be published the day as 2Q; Aug. UK BoE/GfK Inflation Next 12 Months, PPI Input and Output
Matthew Hedrick
Senior Analyst
