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Positions in Europe: Long German Bonds (BUNL)
Asset Class Performance:
- Equities: The STOXX Europe 600 closed down -1.3% week-over-week vs +1.7% last week. Bottom performers: Austria -3.7%; Russia (RTSI) -3.7%; Ukraine -3.3%; Denmark -2.6%; Czech Republic -2.4%; Switzerland -2.3%; Germany -2.0%; France -2.0%; Hungary -2.0%. Top performers: Cyprus +11.7%; Slovakia +0.5%; Greece +0.4%. [Other: UK -1.5%].
- FX: The EUR/USD is down -0.68% week-over-week. W/W Divergences: GBP/EUR +1.24%; DKK/EUR -0.00%; CHF/EUR -0.03; CZK/EUR -0.26%; PLN/EUR -0.78%; RUB/EUR -0.89%; HUF/EUR -1.08%; SEK/EUR -1.15%; NOK/EUR -1.19%.
- Fixed Income: The 10YR yield for sovereigns were mostly higher on the week across the core and periphery. Greece rose the most week-over-week at +43bps to 17.21% (but is down -2% over the last month), followed by Portugal +37bps to 8.04%, Spain +33bps to 5.67% and Italy +16bps to 4.93%. Germany was a main outlier, falling -8bps to 1.52%.
Some Optimism for the Bailout Union:
“But let me tell you, if you are sick and you do not go to the doctor just because you are afraid that somebody will think that you are very sick, you will not get healthier.”
-Jacob Frenkel (Chairman of JPMorgan Chase International) with Tom Keene on 10/24/12
Frenkel really gets to the heart of the matter here with this quote. In assessing the fiscal condition of Eurozone sovereigns and banks there’s both an unwillingness of governments and banks to admit their imbalances, but also uneven or impractical expectations for minimizing these imbalances and/or asking for a bailout. Interestingly, and in response to missing their fiscal and economic targets, many governments, Eurocrats and central bankers alike have moved in recent weeks towards agreement (or acquiescence) that fiscal consolidation is not the answer to long-term health economically. This is flawed thinking in our view and as Frenkel points out will not return the sick patients to health. What’s key is to set realistic expectations and promote a balance between fiscal consolidation and growth.
As depressing and mindboggling as it can be following the conflicted action of Eurocrats to fix the region’s deep cracks, we came across a couple positive charts and data points this week to highlight.
The chart below comes from The Economist and shows changes in nominal compensation across Eurozone countries from the inception of the Eurozone until 2009 and 2009-12.
Clearly a couple key steps to getting the Eurozone back on track include dropping wages and prices to make companies and countries more competitive. As the chart points out, Germany was early (pre global downturn) in taking the pain through job reforms and limiting wage inflation. Consequently (among other factors), Germany has been in a stronger position since 2008. While the chart shows the compensation cuts taken across the periphery in the period 2009-12, clearly there’s more room to go on the downside, particularly from Spain and Portugal, while some progress has already taken place.
Another positive data point comes from bank deposits. ECB data showed this week that consumers and businesses put money back into Spanish and Greek banks in September. Private sector deposits at Spanish banks rose to €1.505T at the end of September from €1.492T a month earlier, reversing an August decline. In addition, Greek bank deposits rose to €160.1B from €158.7B, and of note is that Greek deposits have been relatively stable since the repeat elections in June.
We continue to expect Eurocrats to pull out all stops to maintain the Eurozone’s current fabric to maintain their jobs, live up to the promises of a united Europe, and prevent the domino risk from a country leaving or being forced out of the Union. While the data points above are encouraging signs, and throw in a willingness of the ECB to leverage its balance sheet, we still believe that the path towards a highly functional monetary and fiscal union is years away and that growth expectations for much of the region are too optimistic.
One fact to keep in mind when assessing the Eurozone is the black or shadow economy. It is in fact sizable (and significantly larger in the periphery) and worth consideration as you work through GDP expectations versus “health” on the ground. The chart below from Bloomberg Briefs, is an estimate and a starting place for sizing this economic activity off the books.
The European Week Ahead:
Monday: Oct. Germany Consumer Price Index – Preliminary; Sep. UK Net Consumer Spending, Mortgage Approvals, M4 Money Supply; Sep. Spain Retail Sales
Tuesday: Angela Merkel meeting with Christine Lagarde; Oct. Eurozone Consumer Confidence – Final, Business Climate Indicator, Economic Confidence, Services Confidence; Oct. Germany Unemployment Data Released by Federal Labor Agency, Unemployment Change, Unemployment Rate; Oct. UK CBI Reported Sales, GfK Consumer Confidence Survey; Oct. Spain Consumer Price Index – Preliminary, Budget Balance; Sep. Spain Producer Price Index; 3Q Spain GDP – Preliminary
Wednesday: Spanish short-selling ban expires (expected to be extended until Feb), New EU short selling regulation takes effect; Oct. Eurozone CPI Estimate; Sep. Eurozone Unemployment Rate; Sep. Germany Retail Sales; Sep. France Producers Prices, Consumer Spending; Aug. Spain Total Housing Permits, Current Account; Oct. Italy CPI Preliminary; Sep. Italy Unemployment Rate – Preliminary, PPI; Aug. Greece Retail Sales
Thursday: Oct. UK Nationwide House Prices, PMI Manufacturing; Oct. Spain Manufacturing PMI; Greece Manufacturing PMI
Friday: Oct. Eurozone PMI Manufacturing – Final; Oct. Germany PMI Manufacturing – Final; Oct. UK PMI Construction; Oct. France, PMI Manufacturing – Final; Oct. Italy PMI Manufacturing, Budget Balance
Saturday/Sunday: G20 Fin Min Meeting in Mexico
NOV 8 - ECB Governing Council Meeting
NOV 8-9 - AFME 7th Annual European Government Bond Conference in Brussels
NOV 12 – Eurogroup Meeting in Brussels
NOV 15 – Catalonia regional election in Spain
NOV 22 – ECB Governing Council Meeting
NOV 27 – AFME 4th Annual Spanish Funding Conference in Madrid
DEC 1 – Beginning of the Russian Presidency of G20
DEC 3 – Eurogroup Meeting in Brussels
DEC 6 – ECB Governing Council Meeting
DEC 12-13 – First public consultation between the Russian government, B20 Coalition and international civil society representatives on G20 agenda for 2013 (in Moscow)
DEC 20 – ECB Governing and General Council Meeting
APR 2013 – Parliamentary elections in Italy
MAY 2013 – Presidential elections in Italy
Eurozone - Govt. debt as % GDP rose to 90% in Q2, a new record high.
Italy - Former Italian Prime Minister Berlusconi has decided not to stand as a candidate for prime minister in next spring's elections. He said in a statement on Wednesday that his People of Liberty Party (PDL) plans to hold elections in December to choose his successor.
Germany/Greece - German Finance Minister Schaeuble said that his country may be willing to show some flexibility when it comes to Greece's fulfillment of its bailout terms if there are obstacles that are beyond the control of Athens. He noted that "If the troika should come to the conclusion that there are objective things that the Greeks cannot change on their own and if it makes suggestions for how to solve this, then we will consult on that in the German Bundestag and decide on them accordingly."
Spain - The Spanish government has reported to Eurostat that the deficit is going to come in worse than forecast at 7.2% - 7.4% of GDP versus agreed limit of 6.3% of GDP.
Spain - Moody’s downgraded by one to two notches the ratings assigned to five Spanish regions. It said the decision to downgrade the ratings of the four Spanish regions of Andalucia (to Ba2 from Baa3), Castilla-La Mancha (to Ba3 from Ba2), Catalonia (to Ba3 from Ba1) and Murcia (to Ba3 from Ba1) was driven by the deterioration in their liquidity positions, as evidenced by their very limited cash reserves as of September 2012 and their significant reliance on short-term credit lines to fund operating needs. It added that Catalonia, Andalucia and Murcia face large debt redemptions in Q4 2012 when retail bonds issued in 2011 are due to mature.
Spain - Spanish lenders will transfer newly constructed housing assets into Spain's bad bank at an average discount of 52.2% of original book value, and used homes at an average discount of 47.5% (a report in Expansion was said to have put the haircuts at 54% and 48%, respectively, along with an 86% haircut for land).
Spain - Expansion, citing sources at the Economy Ministry, reported that the Spanish government will formally ask the EU for a bailout package of up to €60B to recapitalize its banking sector. The EU has agreed to make up to €100B available to Spain for the restructuring. The sources said that while Madrid believes that recapitalization needs are really in the ~€40B range, it wants to take a conservative approach.
Spain - Bloomberg, citing people familiar with the talks, reported that European authorities are pushing Bankia to impose losses on junior bondholders. The ECB and European Commission want investors, including preference shareholders, to swap their securities for new shares to reduce the cost to taxpayers. It added that forcing the retail investors who purchased preferred shares as part of publicity drives by banks makes it harder for the government to rebuild Bankia, which was nationalized in June.
Eurozone Government Debt/GDP Ratio 87.3% in 2011 vs 85.4% in 2010
Eurozone M3 2.7% SEPT Y/Y vs 2.8% AUG
Eurozone PMI Manufacturing 45.3 OCT Prelim (exp. 46.5) vs 46.1 SEPT
Eurozone PMI Services 46.2 OCT Prelim (exp. 46.4) vs 46.1 SEPT
Eurozone Composite 45.8 OCT Prelim (exp. 46.5) vs 46.1 SEPT
Germany PMI Manufacturing 45.7 OCT Prelim (exp. 48) vs 47.4 SEPT
Germany PMI Services 49.3 OCT Prelim (exp. 50) vs 49.7 SEPT
Germany IFO Business Climate 100 OCT (exp. 101.6) vs 101.4 SEPT
Germany IFO Current Assessment 107.3 OCT (exp. 110) vs 110.3 SEPT
Germany IFO Expectations 93.2 OCT (exp. 93.6) vs 93.2 SEPT
Germany GfK Consumer Confidence 6.3 NOV vs 6.1 OCT
Germany Import Price Index 1.8% SEPT Y/Y vs 0.9% AUG
France PMI Manufacturing 43.5 OCT Prelim (exp. 44) vs 42.7 SEPT
France PMI Services 46.2 OCT Prelim (exp. 45.4) vs 45 SEPT
France Consumer Confidence 84 OCT (inline) vs 85 SEPT
France Business Survey -21 OCT vs -25 SEPT
France Own-Company Production Outlook -8 OCT vs -5 SEPT
France Production Outlook -56 OCT vs -52 SEPT
France Business Confidence 85 OCT vs 90 September
UK Q3 GDP Prelim 1.0% Q/Q (exp. +0.6%) vs -0.4% in Q2 (officially ends double dip recession) [0.0% Y/Y (exp. -0.5%) vs -0.5% in Q2]
UK CBI Business Optimism -12 OCT (exp. -2) vs -6 SEPT
Italy Business Confidence 87.6 OCT vs 88.3 September
Italy Economic Confidence 76.6 OCT vs 76 September
Italy Consumer Confidence 86.4 OCT (exp. 86.4) vs 86.2 SEPT
Italy Retail Sales -1.0% AUG Y/Y vs -3.2% JUL
Italy Hourly Wages 1.4% SEPT Y/Y vs 1.6% AUG
Spain Unemployment Rate 25.02% in Q3 vs 24.63 in Q2
Spain Mortgages on Houses -28.5% AUG Y/Y vs -17.5% JUL
Spain Mortgages-capital Loaned -33.2% AUG Y/Y vs -27.4% JUL
Spain Producer Prices 3.8% SEPT Y/Y vs 4.1% AUG
Switzerland KOF Swiss Leading Indicator 1.67 OCT vs 1.68 SEPT
Switzerland Money Supply M3 8.9% SEPT Y/Y vs 8.3% AUG
Sweden Consumer Confidence -2.9 OCT (exp. 1.7) vs 2.0 SEPT
Sweden Manufacturing Confidence -16 OCT (exp. -12) vs -11 September
Sweden Economic Tendency 92.3 OCT (exp 95) vs 95.6 SEPT
Sweden Household Lending 4.5% SEPT Y/Y vs 4.6% AUG
Sweden PPI -1.9% SEPT Y/Y vs -1.9% AUG
Finland Unemployment Rate 7.1% SEPT vs 7.3% AUG
Finland House Prices 1.8% in Q3 Y/Y vs 0.9% in Q2
Denmark Consumer Confidence -5.5 OCT vs -2.2 September
Netherlands Producer Confidence -7.7 OCT vs -6.7 SEPT
Netherlands Consumer Spending -2.0% AUG Y/Y vs -1.5% JUL
Netherlands House Price Index -7.9% SEPT Y/Y vs -8.0% AUG
Austria Industrial Production 3.5% AUG Y/Y vs 3.0% JUL
Ireland Property Prices -9.6% SEPT Y/Y vs -11.8% AUG
Czech Republic Business Confidence 2.6 OCT vs 2.7 SEPT
Czech Republic Consumer and Business Confidence -3.3 OCT vs -3.8 SEPT
Czech Republic Consumer Confidence -27 OCT vs -29.8 SEPT
Poland Retail Sales 3.1% SEPT Y/Y vs 5.8% AUG
Poland Unemployment Rate 12.4% SEPT vs 12.4% AUG
Slovakia Unemployment Rate 13.4% SEPT vs 13.2% AUG
Croatia Unemployment Rate 18.3% SEPT vs 17.7% AUG
Turkey Foreign Tourist Arrivals 1.7% SEPT Y/Y vs 9.7% AUG
Interest Rate Decisions:
(10/25) Sweden Riksbank Interest Rate UNCH at 1.25%