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Takeaway: The IMF and ECB hold hands to manipulate markets; investors must weigh global CB intervention versus challenged fundamentals.

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


Positions in Europe: Long German Bonds (BUNL)

Asset Class Performance:

  • Equities:  The STOXX Europe 600 closed down -1.7% week-over-week vs +2.1% last week. Bottom performers: Cyprus -8.7%; Ukraine -4.4%; Spain -3.8%; Sweden -3.2%; Ireland -2.9%; Belgium -2.9%; Denmark -2.8%; Italy -2.3%; Germany -2.3%; Russia (MICEX) -2.2%.  Top performers: Turkey +3.3%; Hungary +0.1%. [Other: France -2.0%; UK -1.3%; Greece -0.6%].
  • FX:  The EUR/USD is down -0.74% week-over-week vs +1.33% last week.  W/W Divergences:  HUF/EUR +1.01%; RUB/EUR +0.35%; GBP/EUR +0.35%; CHF/EUR +0.31%; NOK/EUR +0.15%; RON/EUR +0.08%; CZK/EUR -0.44%; ISK/EUR -0.47%; PLN/EUR -0.52%; SEK/EUR -0.68%.
  • Fixed Income:  The 10YR yield for sovereigns were mostly lower on the week.   Greece declined the most week-over-week at -79bps to 18.21%, followed by Portugal -27bps to 8.05%, Spain -10bps to 5.68% and France -10bps to 2.18%. Italy fell -9bps to 4.97% and Germany was UNCH at 1.48%.  

Weekly European Monitor: The IMF Is All In! - 22. yields

Weekly European Monitor: The IMF Is All In! - 22. EUR

Weekly European Monitor: The IMF Is All In! - 22. cftc data

The IMF Is All In!

The IMF was heavily in the headlines this week:

  • It cut global growth forecast for 2013 from 3.9% to 3.6% assuming the U.S. will avoid the fiscal cliff and Eurozone governments will follow the ECB’s plan to buy sovereign debt by committing to reforms
  • It said several Eurozone governments will not hit the budget deficit targets agreed to with the European Commission (EC), specifically:
    • Expects France's deficit to be 4.7% of GDP in 2012 and 3.5% in 2013. (France has vowed to cut its deficit to the EU-mandated 3% in 2013).
    • Expects Spain's deficit to hit reach 7% of GDP in 2012 (vs EC target of 6.3%) and 5.7% of GDP in 2013, well above the 4.5% target recently maintained by Madrid and the EC.
  • It warned of Eurozone capital flight from periphery to the core and said that European banks may need to sell as much as $4.5 trillion in assets through 2013 (+18% above April estimate) if the crisis is not contained, and
  • IMF Managing Director Christine Lagarde urged countries to put a brake on austerity measures due to concerns about the impact of government spending cuts on growth. She stressed that it no longer makes sense for governments in Europe to stick to budget deficit targets if growth disappoints. She also noted that struggling Eurozone countries should be given more time to close their budget gaps, specifically Greece should be given two more years before facing its fiscal consolidation program, and concessions should be made in Spain.

While our read through is that Lagarde is further joining hands with global central bankers and is attempting to add confidence to the market alongside Draghi’s “unlimited” put in September, comments late Thursday and early Friday from Germany (namely Chancellor Merkel and her Finance Minister Schaeuble) showed the lack of a united voice across Europe. Schaeuble backlashed at Lagarde’s words saying they are contradictory to her recent statements in which she said that high debt levels threatened economic growth.  In short, the fiscally conservative Germans holding the reins in the Eurozone are not comfortable giving peripherals carte blanche on fiscal concessions. Surprised by their response?  We’re not.

All in, we think this further demonstrates the lack of a united voice from Eurocrats on the back of a highly compromised framework. Add to that a sterner voice from the UK this week that it wants no part in a Banking Union (overseen by the ECB) and the powder keg of risk across the Eurozone is further revealed – there is surely a long a rough road ahead to crafting a path forward on such issues as bank recapitalizations, a banking union, and a fiscal union.

So all chips in? 

We remain of the opinion that while the ECB and Fed are supporting asset prices, we’re not jumping head first into equities in Europe. Our main focus is the numerous tail risks that exist across Europe. Here’s what gives us pause:

  • There is no historical precedence for what the ECB or Eurocrats will propose
  • The ECB can change the rules mid-way through, like for example shifting bond seniority status
  • Debt and deficit targets, to judge risk and fiscal health, have become less meaningful as concession are reached at every corner
  • Ball under water risk: given the loop of risk between the sovereign and its banks and the cross border asset ownership links, domino risk remains a clear and present danger

Further Juxtapositions


This week the S&P downgraded Spain by 2 notches to BBB- (one notch above junk) with a negative outlook (which is now in-line with Moody’s rating).  This comes following reporting from the London Times that U.S. hedge funds took down about 25% of the Spanish paper issued in September. Given both announcements we have some unanswered questions:

  • Will Spanish bonds face a selloff by investors worried that the country's credit rating will be cut to junk? (Moody’s still has Spain on review for a potential downgrade and is scheduled to conclude its review by the end of the month). 
  • How will bond pricing be influenced given the wildcard on when Spain requests a formal bailout? Will it not be until after regional elections on Oct 21 (in Basque Country and Galicia) or Catalan elections on November 25th?

We don’t have an answer on when Spain will ask for a bailout, but believe it is no longer a question of “if”. Next week on Oct 18-19 EU leaders will join for a summit. We are less than optimistic that leaders will agree on the scope of the ESM (for recapitalization) and sure nothing besides discussion will govern such key topics as a banking and fiscal union.

The European Week Ahead:

Sunday: Oct. UK Oct. Rightmove House Prices

Monday: Aug. Italy General Government Debt

Tuesday: Oct. Eurozone Zew Survey; Sep. Eurozone EU27 New Car Registrations, CPI; Aug. Eurozone Trade Balance; Oct. Germany Zew Survey; Sep. UK PPI Input, PPI Output, CPI, Retail Price Index; Aug. UK ONS House Price; Aug. Bank of Italy Releases, Trade Balance

Wednesday: Aug. Eurozone Construction Output; Germany Government Releases New Macro-Economic Forecasts

Thursday: EU leaders' summit begins (Oct 18-19); Sep. UK Retail Sales; 3Q Spain House Price Index, Trade Balance; Aug. Italy Current Account

Friday: Aug. Eurozone Current Account; Sep. UK Public Finances, Public Sector Net Borrowing; Aug. Italy Industrial Orders, Industrial Sales

Call Outs:

Financial transactions tax (FTT) - in a somewhat surprising development, eleven Eurozone countries agreed on Tuesday to push forward with a financial transactions tax (the minimum threshold was nine countries). Spain and Italy decided to support the measure following heavy pressure from Berlin. Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain will present a model for how the tax would work by the end of the year, and it’s probably realistic to expect the tax to be implemented by 2014.

Italy - former Prime Minister Berlusconi has begun to signal that he may be ready to scrap his attempt at a political comeback. Berlusconi told the daily Libero that “I want unity of the moderates and I am ready to give up my candidacy, if needed, to achieve a united front." Elections are scheduled for the spring 2013.

Italy - Italian government approved a Stability Law for the 2013-2015 period. It is a package of stimulus measures and spending cuts worth ~€11.6B. The package included an income tax cut of 1% in the two lowest tax brackets that is expected to cost €5B. It also reduced a planned 2% increase in the VAT due to come into effect next June to 1%. Savings from a new financial transactions tax and unspecified fiscal interventions on banks and insurance companies were estimated to eventually amount to €3.5B a year.

ESM Launch – The fund was finally opened on Tuesday and can now lend as much as €200B, while its capacity will increase to €500B over the next 18 months. Until then, ~€192B of leftover EFSF funds will still be available. Recall that the ESM can provide bailout loans to governments, buy bonds in primary and secondary markets and lend money to facilitate bank recapitalizations. However, it cannot directly recapitalize troubled banks until the establishment of a single supervisory mechanism.

  • Fitch was the first ratings agency to assign a rating to the permanent bailout mechanism on Monday. It rated the ESM AAA with a stable outlook.

Ireland - Irish central bank lowers 2012 growth forecast to +0.5% vs prior forecast +0.7%. And lowered its 2013 forecast for GDP to +1.7% from +1.9%

Data Dump:

Eurozone Sentix Investor Confidence -22.2 OCT vs -23.2 SEPT

Eurozone Industrial Production -2.9% AUG Y/Y (exp. -4.1%) vs -2.8% JUL   [0.6% AUG M/M (exp. -0.4%) vs 0.6% JUL]

Germany Industrial Production -1.4% AUG Y/Y vs -1.3% JUL   [-0.5% AUG M/M (exp. -0.6%) vs 1.2% JUL]

Germany Exports 2.4% AUG M/M (exp. -0.6%) vs 0.4% JUL [rose for a second month]

Germany Imports 0.3% AUG M/M (exp. 0.2%) vs 0.3% JUL

Germany Wholesale Price Index 4.2% SEPT Y/Y vs 3.1% AUG

Germany CPI Final 2.1% SEPT Y/Y [unch]


France CPI 2.2% SEPT Y/Y vs 2.4% AUG

France Industrial Production -0.9% AUG Y/Y vs -2.8% JUL

France Manufacturing Production -0.4% AUG Y/Y vs -2.6% JUL

France Bank of France Business Sentiment 92 SEPT vs 93 AUG

UK Industrial Production -1.2% AUG Y/Y vs -0.8% JUL

UK Manufacturing Production -1.2% AUG Y/Y vs -0.7% JUL


Italy Deficit To GDP (YTD) 5.0% in Q2 vs 7.3% in Q1

Italy CPI 2.9% SEPT Y/Y vs 3.2% AUG

Italy Industrial Production WDA -5.2% AUG Y/Y vs -7.2% JUL

Spain CPI Final 3.5% SEPT Y/Y [unch]

Switzerland Unemployment Rate 2.9% SEPT vs 2.9% AUG

Switzerland CPI -0.3% SEPT Y/Y vs -0.5% AUG


Portugal CPI 2.9% SEPT Y/Y vs 3.2% AUG

Portugal Industrial Sales -1.6% AUG Y/Y vs -4.0% JUL

Ireland Construction PMI 41.9 SEPT vs 40.7AUG

Ireland CPI 2.4% SEPT Y/Y vs 2.6% AUG

Netherland Industrial Production -0.6% AUG Y/Y vs -0.3% JUL


Greece CPI 0.3% SEPT Y/Y vs 1.2% AUG

Greece Unemployment Rate 25.1% JUL vs 24.8% JUN

Greece Industrial Production 2.5% AUG Y/Y vs -5.0% JUL


Sweden Industrial Production 3.2% AUG Y/Y vs -0.9% JUL

Sweden Industrial Orders -6.5% AUG Y/Y vs -5.4% JUL

Sweden CPI 0.4% SEPT Y/Y vs 0.7% AUG

Norway CPI 0.5% SEPT Y/Y vs 0.5% AUG

Norway PPI including Oil Prices 1.4% SEPT Y/Y vs 4.4% AUG


Finland Industrial Production -1.4% AUG Y/Y vs 2% JUL

Denmark CPI 2.5% SEPT Y/Y vs 2.6% AUG


Czech Republic CPI 3.4% SEPT Y/Y vs 3.3% AUG

Czech Republic Unemployment Rate 8.4% SEPT vs 8.3% AUG

Czech Republic Industrial Output -3.1% AUG Y/Y vs 4.2% JUL

Russia Light Vehicle and Car Sales 10% SEPT Y/Y vs 15% AUG


Hungary Industrial Production Final 1.4% AUG Y/Y [unch] vs  -2.2% JUL

Hungary CPI 6.6% SEPT Y/Y vs 6.0% AUG

Romania CPI 5.3% SEPT Y/Y vs 3.9% AUG

Turkey Industrial Production -1.5% AUG Y/Y vs 3.3% JUL

Interest Rate Decisions:

(10/9) Serbia Repo Rate HIKED 25bps to 10.75%

Matthew Hedrick

Senior Analyst