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Weekly European Monitor: Buying Time

Takeaway: The ECB creates a new bond buying program (OMTs) but it is far from the elixir to cure Europe’s ills. Growth will remain under pressure.

-- For specific questions on anything Europe, please contact me at to set up a call.


Positions in Europe: Long German Bonds (BUNL); Short EUR/USD (FXE); Short Greece (GREK)


Asset Class Performance:

  • Equities:  The STOXX Europe 600 closed up +2.3% week-over-week vs -0.7% last week. Top performers: Cyprus +10.8%; Greece +7.2%; Italy +6.7%; Spain +6.2%; Portugal +5.6%; Austria +5.0%; Russia (RTSI) +4.6%. Bottom performers: Ukraine -3.3%; Slovakia -0.5% [Other: Germany +3.5%; France +3.1%; UK +1.5%].
  • FX:  The EUR/USD is up +1.72% week-over-week versus +0.56% last week.  W/W Divergences: PLN/EUR +1.75%; CZK/EUR +1.21%; RUB/EUR +0.37%; DKK/EUR 0.00%; HUF/EUR -0.25%; TRY/EUR -0.54%; SEK/EUR -1.49%.
  • Fixed Income:  The 10YR yield for sovereigns fell dramatically across the board for peripheral countries, while the core gained on the week.  Greece saw the largest decline, -181bps to 21.62%, followed by Portugal’s -116bps move to 8.25% and Spain fell -95bps to 5.75bps.  Germany was up +23bps to 1.62% and France gained +5bps to 2.24%.
  • Sovereign CDS:  Sovereign CDS followed yields with all main countries we track down on the week. On a week-over-week basis Spain fell the most, down -168bps to 343bps, followed by Italy -148bps to 315bps, Portugal -133bps to 536bps, Ireland -97bps to 343bps, and France -25bps to 115bps.  


Weekly European Monitor: Buying Time - aa. yields


Weekly European Monitor: Buying Time - aa. cds   a


Weekly European Monitor: Buying Time - aa. cds   b



Buying Time


This week was all about Draghi’s issuance of the newly invented Outright Monetary Transactions (OMTs) program to buy unlimited bonds on the secondary market of Eurozone member states, targeting maturities of 1-3 years. He announced OMTs Thursday morning following the ECB’s decision to keep the main rates on hold, however, most of the details of OMT were leaked on Wednesday during the trading session, so the back half of the week saw significant gains across European capital markets, with positive divergence from the periphery.


Sizing up Draghi’s newest “Blank Check” is difficult – while the market continues to beg for more central bank and state-backed interventions and bailouts, fundamentals remain severely challenged and the feasibility of a Union of uneven states is still very much in question. Spain and Italy, which we’re previously written about, remain hot spots of sovereign and banking risk that we believe will take wind out of the short term optimism sails of this week’s OMTs announcement.


Of note is that Spain has a hefty level of debt maturing in October, namely €35.316B of principal and interest coming due, or 59% of the €59.212B in principal and interest due into the remainder of the year. As PM Mariano Rajoy struggles to issue austerity and cut the deficit (which we expect Spain to miss rather dramatically versus 8.9% of GDP last year) and the means by which its banking system is bailed out (ESM or EFSF and through the FBOR or not) remain unclear, a powder keg of risk is developing on already bombed out fundamentals: GDP in firmly negative territory (-1.3% in Q2 Y/Y); unemployment rate is near 25% (over 50% for youth); we expect rising debt levels; and there are potentially more downgrades from the main ratings agencies to come (for more see our note titled “Idea Alert: Shorting Spain” from 9/4).


Our two grave concerns in Europe broadly are the lack of growth and inability of Eurocrats to construct a functional fiscal union. On growth we’re worried that the periphery will have to continue to revise down its estimates [note that the ECB revised down its GDP estimate in Thursday’s meeting—versus staff projections in June—to -0.6% and -0.2% for 2012 (versus -0.5% and 0.3%) and -0.4% and 1.4% for 2013 (versus 0.0% and 2.0%)] and the core (namely Germany) will not be able to pick up the slack and/or will also underperform estimates.


Weekly European Monitor: Buying Time - aa. eurozone gdp



On a fiscal union, we continue to reiterate that Europe must have a fiscal union alongside its current monetary union to reign in and regulate budgets as well manage the imbalance that has resulted from highly uneven economies (or differentials by way export/import; infrastructure; population size; natural resources; and know how). However, getting to a fiscal union will take a huge step given the inability of member states to relinquish their sovereignty to Brussels (and/or Frankfurt). To be sure, getting to a fiscal union is complicated by the cultural differences (language in particular) that divide nations and prevent loose conditions to work in states outside of one’s home country. 


In short, while the OMTs will “benefit” yields, especially from the periphery and towards the shorter end of the curve, artificial support (sovereign buying) and flooding the system with liquidity is not going to solve Europe’s problems. And growth, for sure, will remain under pressure (see PMIs for August below under Data Dump).


The week ahead offers two big catalysts, namely the German Constitutional Court’s decision on the ESM (with a banking license) and the Fiscal Union. Interestingly, Reuters reported that all 20 public and constitutional law professors it surveyed predicted that the court will approve the ESM and fiscal compact. However, twelve professors noted that approval is likely to come with tough conditions limiting the government's flexibility on any new rescues. In addition, five said that the court is likely to signal that Eurozone integration has reached the limits permitted by the constitution, suggesting the potential for a public referendum.


A second catalyst to watch is the Dutch General Election. Currently two pro-European political parties lead polls: Prime Minister Mark Rutte's Liberal Party followed closely by the Labor Party, which is pro-euro but unlike the Liberal Party, opposes tough austerity measures. The two parties could form a center-right coalition with the support of just one other party, potentially the socially liberal D66 Party. Worth noting is the waning support for the Socialists who were previously polling high and who oppose deeper Eurozone integration, as well as the decline in the Freedom Party, which has pushed for an exit from the euro and a return to the guilder.  



Call Outs:


Spain - even after the ECB unveiled the details of its new intervention plan, Spanish Prime Minister Rajoy continued to push back against calls to make an official request for support. He also signaled his reluctance to accept new conditions that could be attached to additional external support, pointing out that he had no intention of touching Spanish pensions. One senior EU official said he saw a Spanish aid request around the time of the October 18-19 leaders' summit as a "best-case scenario".    


France - CAC 40 changes: Peugeot to be replaced by Solvay (changes to take effect on September 24)


Moody’s - cut its EU outlook to negative to reflect risks to Aaa of Germany, France, UK, and Netherlands. 


France - LVMH chairman being hauled in front of the French PM to defend their decision to move 200 top managers to New York due to the new 75% top tax rate on pay > €1 million. 


Germany - missed its target of €5B and only sold €3.61B of new 1.5% 10YR bonds, average yield 1.42% [Bid-cover ratio 1.1 vs previous 1.8]


Germany - A poll from Forsa for Stern magazine (a German publication) found 30% of respondents said that they had little trust in ECB President Draghi, while 12% noted that they had none at all. Roughly 18% said that they held him in esteem, while 31% said that they did not know him and 9% had no opinion at all. Recall that German Chancellor Merkel has blessed the ECB's intervention plan as a bridge to her preferred longer-term solution to address the debt crisis: deeper fiscal and political integration.





Our immediate term TRADE range for the cross is $1.24 to $1.26. The move above our resistance level is a reflection of optimism around the OMTs program. We expect the cross to come in after this initial optimism.  Please see my colleague Daryl Jones’ note today titled “Is the Move in the Euro More Than A Short Squeeze?” for more thoughts on the cross.


In the second chart below we look at CFTC data for net contracts of Euro non-commercial positions. Interestingly, since a high in short position in the Euro on 6/5/12 (-213.060 contracts), investors have been less bearish (and covering). Week over week, contracts are 17% less bearish, -125.817 to -103,977 as of 8/28. 


Weekly European Monitor: Buying Time - aa. eur usd


Weekly European Monitor: Buying Time - aa. CFTC



Data Dump:


Weekly European Monitor: Buying Time - aa. pmi neu


Eurozone Q2 GDP Preliminary -0.2% Q/Q (inline)   [-0.5% Y/Y vs previous est. -0.4%]

Eurozone PPI 1.8% JUL Y/Y (exp. 1.6%) vs 1.8% JUN   [0.4%  JUL M/M vs -0.5% JUN]

Eurozone Retail Sales -1.7% JUL Y/Y (exp. -1.7%) vs -0.9% JUN   [-0.2% M/M (exp. -0.2%) vs 0.1% JUN]


Germany Factory Orders -4.5% JUL Y/Y (exp. -4.5%) vs -7.6% JUN   [0.5% JUL M/M (exp. 0.3%) vs -1.6% JUN]


Weekly European Monitor: Buying Time - aa. german factory orders


Germany Exports 0.5% JUL M/M (exp. -0.5%) vs -1.4% JUN

Germany Imports 0.9% JUL M/M (exp. -0.3%) vs -2.9% JUN

Germany Labor Costs (Seasonally Adjusted) 1.5% in Q2 Q/Q vs 0.2% in Q1

Germany Labor Costs (Workday Adjusted) 2.5% in Q2 Y/Y vs 1.8% in Q1

Germany Industrial Production -1.4% JUL Y/Y (exp. -3.0%) vs 0.3% JUN


France ILO Unemployment Rate 10.2% in Q2 vs 10% in Q1


UK Halifax House Prices -0.9% AUG Y/Y vs -0.6% JUL

UK PMI Construction 49 AUG (exp. 50) vs 50.9 JUL

UK New Car Registrations 0.1% AUG Y/Y vs 9.3% JUL

UK Industrial Production -0.8% JUL Y/Y (exp. -2.7%) vs -3.8% JUN

UK PPI Input 2.0% AUG M/M (exp. 1.7%) vs 0.4% JUL   [1.4% AUG Y/Y (exp. 1.4%) vs -2.4%]

UK PPI Output 0.5% AUG M/M (exp. 0.2%) vs 0.1% JUL   [2.2% AUG Y/Y (exp. 1.9%) vs 1.8% JUL]


Italy New Car Registrations -20.23% AUG Y/Y vs -21.39% JUL


Spain Unemployment Change +38.2K AUG (= first increase in 5 months)  vs -27.8K JUL

Spain Industrial Output -5.4% JUL Y/Y vs -6.1% JUN


Switzerland Q2 GDP -0.1% Q/Q (exp. 0.2%) vs 0.5% in Q1   [0.5% Y/Y (exp. 1.6%) vs 1.2% in Q1]

Switzerland Retail Sales 3.2% JUL Y/Y vs 3.3% JUN

Switzerland CPI -0.5% AUG Y/Y vs -0.8% JUL

Switzerland Unemployment Rate 2.9% AUG vs 2.9% JUL


Netherlands CPI 2.3% AUG Y/Y vs 2.3% JUL

Netherlands Industrial Production 0.1% JUL (exp. -2.3%) vs -2.0% JUN


Finland Q2 GDP -0.1% Y/Y vs 2.2% in Q1   [-1.1% Q/Q vs 0.9% in Q1]

Norway Credit Indicator Growth 6.9% JUL Y/Y vs 7.1%

Norway Industrial Production 2.6% JUL Y/Y vs 7.7% JUN

Iceland Q2 GDP -6.5% Q/Q vs 0.3% in Q1   [0.5% Y/Y vs 4.2% in Q1]


Greece Unemployment Rate 24.4% JUN vs 23.1% MAY

Greece Q2 GDP Final -6.3% Y/Y

Malta Q2 GDP 3.0% Y/Y vs 1.0% in Q1


Portugal Industrial Sales -3.8% JUL Y/Y vs -2.3% JUN

Portugal Q2 GDP Final -1.2% Q/Q (inline)   [-3.3% Y/Y (inline)]


Ireland Industrial Production 4.8% JUL Y/Y vs 4.9% JUN

Ireland Unemployment Rate 14.7% AUG vs 14.7% JUL


Czech Republic Retail Sales 0.3% JUL vs -0.8% JUN

Czech Republic Q2 GDP Final -0.2% Q/Q (inline)   [-1.0% Y/Y (initial -1.2%)]

Hungary Q2 GDP Final -0.2% Q/Q (inline)   [-1.3% Y/Y (initial -1.2%)]

Hungary Industrial Production -2.2% JUL Y/Y vs 0.6% JUN


Romania Retail Sales 4.4% JUL Y/Y vs 4.0% JUN

Romania Producer Prices 5.7% JUL Y/Y vs 5.8% JUN

Romania Q2 GDP Preliminary 0.5% Q/Q (inline)   [1.2% Y/Y (inline)]


Estonia CPI 3.8% AUG Y/Y vs 3.6% JUL

Estonia Q2 GDP Final 0.5% Q/Q (initial 0.4%)   [2.2% Y/Y (initial 2.0%)]

Latvia Q2 GDP Final 1.3% Q/Q (initial 1.0%)   [5.0% Y/Y (initial 5.1%)]


Russia Consumer Prices 5.9% AUG Y/Y vs 5.6% JUL

Russia Q2 GDP Preliminary 4.0% Y/Y vs 4.9% in Q1


Turkey CPI 8.88% AUG Y/Y vs 9.07% JUL

Turkey PPI 4.56% AUG Y/Y vs 6.13% JUL



Interest Rate Decisions:


(9/5) Poland Base Interest Rate UNCH at 4.75%

(9/6) BOE Interest Rate UNCH at 0.50% 

(9/6) BOE Asset Purchase Target UNCH at 375B GBP

(9/6) ECB Interest Rate UNCH at 0.75%

(9/6) Riksbank Interest Rate CUT 25bps to 1.25% [consensus was for no change]

(9/6) Serbia Interest Rate UNCH at 10.50%



The European Week Ahead


Monday: Sep. Eurozone Sentix Investor Confidence; 4Q Germany Manpower Employment Outlook; Aug. Germany Wholesale Price Index (Sep 10-12); Aug. UK RICS House Price Balance; Aug. France BoF Business Sentiment; Jul. France Industrial Production, Manufacturing Production; 2Q Italy GDP – Final; Aug. Greece CPI,  Industrial Production


Tuesday: Jul. UK. Trade Balance; 2Q France Non-Farm Payrolls – Final; Jul. Spain House Transactions


Wednesday: Jul. Eurozone Industrial Production; Germany’s Constitutional Court will rule on the ESM & Fiscal Pact; Aug. Germany CPI – Final; Aug. UK Claimant Count, Jobless Claims Change; Jul. UK Average Weekly Earnings, Unemployment Rate, Employment Change; Aug. France CPI; Jul. France Current Account; Aug. Spain CPI – Final; Jul. Italy Industrial Production; Dutch General Election


Thursday: 2Q Eurozone Labour Costs; Aug. Italy CPI - Final; Jul. Italy General Government Debt; 2Q Greece Unemployment Rate


Friday: Aug. Eurozone CPI; 2Q Eurozone Employment; 2Q Spain Labour Costs, House Prices ToT Homes; Jul. Italy Current Account



Matthew Hedrick

Senior Analyst


Upcoming Hedgeye Events

Upcoming Hedgeye Events - events


The Economic Data calendar for the week of the 10th of September through the 14th is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.



investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.


Takeaway: China’s “stimulus” package really isn’t all that stimulating when analyzed in greater context.



  • From our purview, there are a number of things that are worrisome with China’s recent economic stimulus announcement.
  • Among other constraints, the size and scope of the latest measures are hardly large enough to substantially reflate Chinese economic growth over the intermediate term.
  • Moreover, Chinese policymakers are unlikely to pursue any fiscal or monetary policies with enough firepower to meaningfully inflect the slope of Chinese growth over the intermediate term – absent a precipitous decline in global growth.


Overnight, China’s benchmark equity index, the Shanghai Composite, closed up a +3.7% – its largest day/day gain since JAN 17 on widespread reports that Beijing had fired the first rounds of its [pending] economic stimulus “bazooka”. The infrastructure investment initiatives, which were allegedly announced via the National Development and Reform Commission (though, suspiciously, nowhere to be found on their website) range from 25 light rail/subway projects valued at CNY800 billion ($126B) to 55 total infrastructure projects (some previously announced) valued at CNY1 trillion ($160B).


From our purview, there are a number of things that are worrisome with this announcement:


  • Explicit timelines for project implementation did not accompany the announcement(s) and various sources were quoted in financial media articles as suggesting the projects would range from 2H12-2018 to four years on average, per project.
  • While we certainly aren’t questioning the Chinese government’s ability to finance itself, it would be nice to see concrete plans for fundraising. While trending in the right direction in recent quarters (i.e. down), more local government financing is certainly not a positive as it relates to the health of the Chinese banking system, given the obvious risks associated with one of their main sources of income (i.e. land sales).
  • Since 2008, the Chinese economy has grown by +50.1% on a nominal basis to CNY47.2 trillion (full-year 2011), meaning that the high-end estimate of CNY1 trillion for the stimulus measures is approximately 2% of the total Chinese economy. Compared to the CNY4 trillion stimulus at the end of 2008, which was 12.7% of nominal GDP then, and also concentrated in two years (2009-10), the latest announcement is a far cry from anything dramatic enough to meaningfully reflate Chinese economic growth.


The latter point has long been our research view on China’s POLICY outlook, specifically in that Chinese policymakers are unlikely to pursue any fiscal or monetary policies with enough firepower to meaningfully inflect the slope of Chinese growth over the intermediate term – absent a precipitous decline in global growth. More importantly, we continue to hold this view in the face of a divergent consensus outlook for Chinese policy, as our predictive-tracking algorithms suggest A) the slope of Chinese economic growth appears to be leveling off, allowing policymakers to achieve their +7.5% real GDP growth target for 2012; and B) inflation is likely to accelerate in 2H12. Both severely depress the need and scope for introducing a major economic stimulus package over the intermediate term, which is what we think those who are bearish on the Chinese economy are most afraid of.




For more details on why we initially arrived at the aforementioned conclusion, refer to the following research notes:


  • CHINA’S RATE CUT IS LIKELY A BAD SIGN OF WHAT LIES AHEAD (6/7): We don’t see the early innings of this Chinese rate cut cycle as a signal to get bullish on China’s economy or equity market at the current juncture. Moreover, we do not find it prudent for investors to increase their asset allocation exposure to commodities here.
  • CHINESE GROWTH: STICKING TO THE CENTRAL PLAN (7/13): We maintain conviction in our view that Chinese economic growth is not poised to meaningfully inflect over the intermediate term. Furthermore, we can’t stress how much the late-year transition in leadership or the growing official realization that the 2008-09 stimulus package and central plan (i.e. state-directed lending) contributed heavily to a rapid and potentially unhealthy expansion in credit (+96.6% since the end of 2008) may slow Chinese policymakers’ fiscal/regulatory response [if any] to an incremental deterioration in economic growth. Remember, Chinese banks have yet to see a material deterioration in credit quality (the industry-wide NPL ratio is at a measly 0.9%), so it’s not unreasonable to believe that Chinese policymakers could be saving their “bullets” for a potentially more worthy cause than a purposefully-engineered slowdown in Real GDP growth to +10bps above their official 2012 “target” of +7.5% (announced in MAR).
  • PONDERING CHINESE GROWTH PART II (7/17): Contrary to consensus speculation, we are of the view that Chinese policymakers are likely not readying a stimulus package to be announced and administered over the intermediate term that would be substantial enough to meaningfully inflect the slope of Chinese economic growth. As such, it would be prudent to fade any incremental Chinese stimulus rallies for the time being.


In summary, it does not appear to us as Beijing is willing to unleash the “bazooka” at the current juncture, as this latest announcement is somewhere between “stimulus-light” and “business as usual” for China’s state-run economy. The timing of the ECB announcement yesterday and the FOMC decision next week probably provided a fair amount of cover for sell-siders to perpetuate the NDRC’s announcement as part of their “globally coordinated easing” storytelling. In reality, however, the package really isn’t all that stimulating when analyzed in greater context. For now at least, Chinese stocks agree with our fundamental conclusions:




Have a great weekend,


Darius Dale

Senior Analyst


Takeaway: Slowing employment growth among younger demographics could imply decelerating trends at QSR $MCD $BKW $WEN $CMG $JACK

Employment statistics released this morning by the Bureau of Labor Statistics were mixed from a restaurant industry perspective.  The hiring data (released on a one month lag) indicates a growing divergence between full-service and limited-service employment growth in July.  The employment by age chart shows a sequential deceleration in employment growth from July to August.  


Employment by Age


Sequential Acceleration/Deceleration from July to August in employment growth:










55-64 YOA: FLAT


Takeaway: The deceleration in employment growth among younger cohorts may have slowed the growth in QSR same-restaurant sales during the month August.





Industry Hiring


The chart below shows that, as of July, full service restaurants continue to hire at a faster rate, versus last year, than limited service restaurants.  The Leisure & Hospitality employment data is released in step with the major headline data and so it gives us an idea of how August might look.  Given the close relationship between Leisure & Hospitality employment growth and full service employment growth, we would expect stabilization in that trend next month.  If we do not see that stabilization in full service employment trends in August and, at the same time, we see that Leisure & Hospitality decelerated into September, that would not be a bullish indicator for 3Q casual dining same-restaurant sales trends.


EMPLOYMENT PICTURE NOT GOOD - restaurant employment


EMPLOYMENT PICTURE NOT GOOD - leisure   hospitality



Howard Penney

Managing Director


Rory Green



Here I Go Again: SP500 Levels, Refreshed

Takeaway: Growth Slowing will continue if commodities continue higher. Burning The Buck is a market trade, not an economic solution.



“Here I go again on my own, like a drifter I was born to walk alone…”


But I’ve made up my mind, and shorted SPY one more time. I’m shorting it for different reasons than I would have yesterday, but the growth/earnings bulls of March 2012 change their thesis every other week, so I won’t sweat that.


Growth Slowing will continue if commodities continue higher. Burning The Buck is a market trade, not an economic solution.


Here are the lines in my model that matter to me most:


  1. Immediate-term TRADE overbought = 1437
  2. Intermediate-term TREND support = 1419


In other words, that’s your new risk range and overbought is as overbought does. If we snap 1419, that’s going to open up a whole new host of risks that I will not be exposed to. So we’ll wait, watch, and deal with that if we need to then.


What would have me become your huckleberry on the bull side of equities (bear side of bonds)? Easy answer: Growth Accelerating.


And it’s easier to see that not happening today than it was in March.


Enjoy the weekend,



Keith R. McCullough
Chief Executive Officer


Here I Go Again: SP500 Levels, Refreshed - 1

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