Asset Class Performance:
- Equities: The STOXX Europe 600 closed up +1.2% week-over-week vs +0.9% last week. Top performers: Greece +3.9%; Portugal +3.4%; Cyprus +3.0%; Finland +2.8%; Russia (MICEX) +2.5%; Netherlands +1.8%; Ireland +1.7%; Ukraine +1.7%; Denmark +1.6%. Bottom performers: Hungary -2.6%; Spain -1.1%; Italy -0.7%; Czech Republic -0.4%; Norway -0.3%. [Other: Germany +1.5%; France +1.4%; UK +0.8%].
- FX: The EUR/USD is down -0.45% week-over-week vs +0.22% last week. W/W Divergences:RUB/EUR +0.67%; GBP/EUR +0.62%; NOK/EUR +0.45%; CZK/EUR +0.22%; SEK/EUR +0.17%; DKK/EUR +0.04%; CHF/EUR -0.23%; PLN/EUR -0.40%; RON/EUR -0.40%; HUF/EUR -0.73%.
- Fixed Income: The 10YR yield for sovereigns were mostly flat across the region week-on-week, excluding Greece (more below on the Greek bond buyback). Greece declined -175bps to 14.46%. France -9bps to 5.46%, Germany -7bps to 1.30%, and Portugal -6bps to 7.56%. Spain gained +8bps to 2.07% and Italy was flat at 4.53%.
EUR/USD: Our TRADE range is $1.29 – 1.31 with a TREND resistance of $1.31.
- Our call - the EUR/USD will trade within our quantitative levels and reflect much of the daily headline risk (from Spain, Greece, and Italy in particular), however ECB President Mario Draghi’s September announcement that “the ECB is ready to do whatever it takes to preserve the euro” and the resolve of Eurocrats to maintain the Union will prevent levels falling anywhere near parity.
- We believe there is a high likelihood that no significant policy action comes in the remaining weeks of 2012, which could support the band the cross has been trading in over the last weeks.
- We expect that the ECB and Germans will be at loggerheads over the formation of a Banking Union and Fiscal Union, which should strengthen the lid on the EUR/USD at $1.31.
- The cross could weaken alongside the ECB showing some willingness to cut the benchmark interest rate: Draghi cited that there was wide discussion [about a rate cut] but the prevailing consensus was to leave rates unchanged when the council met on Thursday.
The week’s news-flow was dominated by Greece’s sovereign debt buyback program (more below), however our eyes were drawn to growth forecasts that were greatly cut this week. The revisions came as no great surprise – and signal to us that despite all the market intervention (Draghi “unlimited” OMT), prices will (in time) reflect the underlying health (or lack thereof) of the region. While Greece may continue to maintain the spotlight, we’re focused on the underlying health of the region; we think estimates are just now getting closer to the pain the region has dragged itself into. Here are the notables:
The ECB staff’s Eurozone GDP projections fell for yet another reading for this year and next:
Eurozone 2012 GDP - DEC: -0.6% and -0.4% SEPT: -0.6% and -0.2% JUN: -0.5% and +0.3%
Eurozone 2013 GDP - DEC: -0.9% and +0.3% SEPT: -0.4% and +1.4% JUN: 0.0% and +2.0%
The Chancellor of the Exchequer George Osborne forecast 2012 UK GDP of -0.1% versus +0.8% in March and +1.2% in 2013 versus a previous estimate of +2.0%.
The German Bundesbank cut its forecast for economic expansion in Germany to +0.7% this year, down from its previous forecast of +1%, and revised 2013 projections to +0.4% versus +1.6% predicted in June.
Banking Union Blues
This week EU finance ministers came to no conclusion on establishing the framework for a single supervisory mechanism (SSM) – aka a banking union—by 1 January 2013. Ministers are expected to reconvene on December 12th in Brussels, but we have our doubts that anything concrete will come from it. At the heart of it is an issue that was raised in the Q&A of Draghi’s press conference on Thursday, along the lines:
“Given that the ECB’s stance on a Banking Union remains that it should include all 6,000 banks whereas the Germans believe it should only include its largest banks, if it is decided that a Banking Union does not include all 6K does it make sense to have it at all?”. To this Draghi dodged the answer and only said that a Banking Union needs a strong supervisor where the ECB doesn’t have reputational risk.
This is a clear signal to us that the ECB and Germans (in particular) will be at loggerheads over the formation of a Banking Union. Further we think there will be extensive push back on countries giving up their fiscal sovereignty to reach a Fiscal Union.
For more on the ECB’s decision to keep rates on hold see Thursday’s note titled “December ECB Presser: Only Growth Cut, Happy Holidays!”
Greece Buyback, continued
Official results have not yet been released (and may not until next week) but Greece met today’s deadline to use a 10 billion EUR loan from Europe’s bailout fund (EFSF) to buy back some of the 62 billion EUR of new bonds issued when Greece restructured its privately held debt in March and unblock its next aid tranche (34.5B EUR) as part of a package approved from the European Union and International Monetary Fund to cut the nation’s debt to 124% of GDP in 2020 from a projected 190% in 2014.
Note: Greek banks held about 15 billion EUR of the bonds, while the country’s pension funds had 8 billion EUR, according to a Nov. 27 draft report by the troika of the European Commission, European Central Bank and IMF. According to Royal Bank of Scotland Group, hedge funds held as much as 22 billion EUR of Greek government bonds.
Despite uncertainty over bank participation earlier in the week, just today Greece’s three largest banks (National Bank of Greece SA, Alpha Bank SA, and Eurobank Ergasias) agreeing to participate, with Finance Minister Yannis Stournaras saying that the banks would have legal indemnity from potential shareholders who might file lawsuits against losses suffered.
Based on information in a statement from the Athens-based Public Debt Management Agency on Dec. 3, the prices offered for bonds maturing from 2023 to 2042 averaged 33.1% of face value, which compares with the average price of 28.1% of face value on Nov. 23.
We have no further comment on Greece or the buyback beyond reporting the developments. We continue to view Greece as a shell game that Eurocrats are running.
If Italy didn’t have enough on its hands with its outsized sovereign debt, political tensions flared this week when on Thursday, former Prime Minister Berlusconi's centre-right PDL abstained from a vote in the Senate on stimulating economic growth and a vote in parliament on cutting regional spending. Despite the move, Prime Minister Monti had a quorum, and the measures still passed in both chambers. In addition, the PDL said that the abstentions were intended to signal its disapproval of Italy's economic policies and not a move to topple the Monti government.
While tension appear to have calmed, speculation around Berlusconi running in next year’s election (set for early March) remains a destabilizing force. However, it’s worth noting that Berlusconi and the PDL are trailing badly in the opinion polls. According to a poll by Demos & Pi published in La Republica today, support for the PDL has fallen to 18.2% from 23.5% in March. In addition, the centre-left PD has seen its support jump to 37.8%, the highest since its founding in 2007.
The European Week Ahead:
Sunday: Nov. UK releases Lloyds Employment Confidence
Monday: Dec. Eurozone Sentix Investor Confidence; Oct. Germany Exports, Imports, Trade Balance, Current Account; Nov. UK RICS House Price Balance; Nov. France BoF Business Sentiment; Oct. France Industrial Production, Manufacturing Production; Oct. Italy Industrial Production; 3Q Italy GDP – Final; Nov. Greece CPI; Oct. Italy Industrial Production\
Tuesday: Dec. Eurozone ZEW Survey Economic Sentiment; Dec. Germany ZEW Survey Current Situation and Economic Sentiment; 3Q France Non-Farm Payrolls - Final
Wednesday: First public consultation between the Russian government, B20 Coalition and international civil society representatives on G20 agenda for 2013 (in Moscow); Oct. Eurozone Industrial Production; Nov. Germany CPI – Final; Nov. UK Jobless Claims Change, Claimant Count Rate; Oct. UK Average Weekly Earnings, ILO Unemployment Rate, Employment Change; Nov. France CPI; Oct. France Current Account; Oct. Spain House Transactions
Thursday: Dec. Eurozone Bloomberg Economic Survey, ECB Publishes Monthly Report; 3Q Eurozone Labour Costs; 1Q13 Germany Manpower Employment Outlook (Dec. 13-15); Dec. Germany Bloomberg Economic Survey; Dec. UK Bloomberg Economic Survey, CBI Trends Total Orders and Selling Prices; Dec. France Bloomberg Economic Survey; Dec. Spain Bloomberg Economic Survey; Nov. Spain CPI – Final; Dec. Italy Bloomberg Economic Survey; Nov. Italy CPI – Final; 3Q Greece Unemployment Rate
Friday: Dec. Eurozone PMI Manufacturing - Advance; Nov. EU27 New Car Registrations; Dec. Germany PMI Manufacturing and Services – Advance; Dec. France. PMI Manufacturing and Services - Preliminary; 3Q France Wages – Final; 3Q Spain House Prices, Labour Costs
ESM - Moody’s downgrades ESM to Aa1 from Aaa. It said the decision was driven by the recent
downgrade of France to Aa1 from Aaa and the high correlation in credit risk which it believes is present
among the entities' largest financial supporters.
Spain - PM Rajoy says it may be “very complicated” to achieve 6.3% deficit to GDP target in 2012 given revenue problems and high financing costs. Rajoy reiterated that if an intervention request is in Spain's interest in the future, he would not have any doubts about turning to the ECB for help.
Greece - S&P puts Greece in “selective default” following the launch of their debt buyback.
Germany - Chancellor Merkel Begins Election Drive after her party nearly unanimously re-elected her as party leader.
Eurozone banks - The WSJ said that after borrowing more than €1T from the ECB nearly a year ago, some of Europe's biggest banks are preparing to repay the three-year loans early (they can start next month). The paper added that while the push to repay the loans highlights the partial recovery in the industry, it has also generated some concerns that banks are moving too fast and could be exposed if the crisis flares up again. According to the article, a poll conducted by Morgan Stanley found that European banks are expected to repay a total of ~€80B of the ECB loans in early 2013, with the bulk of the funds coming from the northern European banks. The Journal also discussed how repayment speeds may be influenced by the lack of opportunities to deploy the borrowed funds to businesses and individuals.
Italy - Italian banks held a total of €273B in funds from the ECB at the end of November, down from €276.5B in October, according to ECB data. Italian lenders took down a total of €255B in three-year funds from the ECB's LTROs in December 2011 and February 2012.
Eurogroup - Jean-Claude Juncker said he plans to step down at the end of the year. No replacement named.
Eurozone Prelim. Q3 GDP -0.1% Q/Q (UNCH) [-0.6% Y/Y (UNCH)]
Eurozone PPI 2.6% OCT Y/Y vs 2.7% SEPT
Eurozone Retail Sales -3.6% OCT Y/Y (exp. -0.8%) vs -1.6% SEPT [-1.2% OCT M/M (exp. -0.2%) vs -0.6% September]
Germany Factory Orders -2.4% OCT Y/Y vs -3.9% September
Germany Labor Costs 3.3% in Q3 Y/Y vs 2.7% in Q2
Germany Industrial Production -3.7% OCT Y/Y vs -0.8% September
France ILO Unemployment Rate 9.9% in Q3 vs 9.8% in Q2
UK PMI Construction 49.3 NOV vs 50.9 OCT
UK Industrial Production -3.0% OCT Y/Y vs -3.2% September
UK Manufacturing Production -2.1% OCT Y/Y vs -1.7% SEPT
UK BoE/GfK Inflation Next 12 Months 3.5% NOV vs 3.2% OCT
UK Halifax House Prices -1.3% NOV Y/Y vs -1.7% OCT
UK New Car Registrations 11.3% NOV Y/Y vs 12.1% OCT
Switzerland Retail Sales 2.7% OCT Y/Y vs 5.0% SEPT
Switzerland Unemployment Rate 3.1% NOV vs 2.9% OCT
Switzerland CPI -0.1% NOV Y/Y vs -0.1% OCT
Spain Industrial Output WDA -3.3% OCT Y/Y vs -7.5% SEPT
Portugal Final Q3 GDP -0.9% Q/Q vs initial estimate -0.8% [-3.5% Y/Y vs initial estimate -3.4%]
Netherlands CPI 3.2% NOV Y/Y vs 3.3% OCT
Netherlands Industrial Production -1.7% OCT Y/Y vs -0.2% September
Norway Industrial Production 2.5% OCT Y/Y vs -5.0% September
Finland Q3 GDP -0.1% Q/Q (exp. 0.3%) vs -1.1% in Q2 [-1.2% Y/Y (exp. -0.8%) vs -0.3% in Q2]
Ireland Unemployment Rate 14.6% NOV vs 14.7% OCT
Ireland Industrial Production -16.7% OCT Y/Y vs -12.6% SEPT
Austria Wholesale Price Index 2.8% NOV Y/Y vs 4.2% in OCT
Iceland Q3 GDP 3.5% Q/Q vs -6.5% in Q2 [2.1% Y/Y vs 0.5% in Q2]
Greece Final Q3 GDP -6.9% Y/Y vs initial estimate -7.2%
Greece Unemployment Rate 26.0% SEPT Y/Y vs 25.3% AUG
Russia CPI 6.5% NOV Y/Y vs 6.5% OCT
Czech Republic Retail Sales 2.2% OCT Y/Y vs -2.9% SEPT
Romania Producer Prices 6.8% OCT Y/Y vs 6.6% SEPT
Romania Retail Sales 0.7% OCT Y/Y vs 5.1% September
Turkey Consumer Prices 6.37 NOV Y/Y vs 7.80% OCT
Turkey Producer Prices 3.60% NOV Y/Y vs 2.57% OCT
Malta Q3 GDP 4.3% Y/Y vs 3.8% in Q2
Cyprus Q3 GDP -0.4% Q/Q vs -0.5% in Q2 [-2.0% Y/Y vs -2.2% in Q2]
Interest Rate Decisions:
(12/5) Poland Base Rate Announcement CUT 25bps to 4.25%
(12/6) ECB Interest Rate on HOLD at 0.75%
(12/6) BOE on HOLD at 0.50% and asset purchase at 375B GBP