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Italy’s Grillo Talks Down The Euro

There was a lot of noise out of Italy this weekend on election developments; however there is no more certainty on the formation of a grand coalition versus the call for another election. Italy’s FTSE MIB equity index is bearish TRADE and TREND and is now down -13.1% since its YTD high on 1/29. Of note is that Beppe Grillo said that he wants an online referendum on Italy’s membership in the EUR.  Make no mistake about the impact of social media and a former comedian (Grillo) can have on the EUR/USD.

 

Election Developments in Italy

 

It’s no clearer today whether there will be a formation of a grand coalition or the need for another round of elections. Here’s the update:

  • Neither Bersani nor Grillo are pushing for a coalition
  • Bersani insists he would form a new government on his own without seeking an alliance with his main rivals, Berlusconi and Grillo
  • Bersani issued an ultimatum to Grillo to support a temporary government
  • Grillo is repeatedly against a coalition but said his party might support a government if it changed the electoral law, cut politicians expenses and set a two-term limit for parliamentarians
  • Italian President Giorgio Napolitano is exploring the possibility of putting together a coalition between the center-left and center-right, but with neither Bersani nor Berlusconi as Prime Minister. Two names are under consideration are former center-left prime minister Giuliano Amato and Matteo Renzi, the reformist Democrat mayor of Florence
  • Berlusconi says he is in favor of going down this route only if the center-left agrees to support his yet to be named candidate to succeed Napolitano as president after his seven-year term ends on May 15th
  • Napolitano has been adamant that he wants to avoid an immediate vote

Our critical level for the FTSE MIB is TREND line resistance of 16,449. The index is broken on both its immediate term TRADE and intermediate term TREND levels.

 

Italy’s Grillo Talks Down The Euro   - y. mib

 

On Grillo’s EUR Talk

  • Grillo said that he wants an online referendum on Italy’s membership in the EUR. While such a vote would not be legally binding in Italy, it could carry a lot of political weight given the power of social media. We think the call should influence the EUR/USD to the downside.

Our critical quantitative lines on the EUR/USD are outline in the chart below:

 

Italy’s Grillo Talks Down The Euro   - Y. eur USD

 

The spread on the Italian 10 year yield and German bunds shows no abatement in the steady rise. Given the runway of political uncertainty we expect this spread to continue its move higher over the coming weeks.

 

Italy’s Grillo Talks Down The Euro   - y. cds spread

 

 

Matthew Hedrick

Senior Analyst


Less Bullish: SP500 Levels, Refreshed

Takeaway: Overall, testing and holding 1502-1504 is what the bulls should want. Up every week builds exhaustion.

This note was originally published March 04, 2013 at 10:30 in Macro

POSITIONS: 9 LONGS, 7 SHORTS @Hedgeye

 

US stocks up for 8 of the last 9 weeks and failed to overcome the weekly closing high (1519) both into Friday’s close and on this morning’s open. Pretty low stress signal, but I want to respect it for what it is, for now. Overall research fundamentals are actually still improving.

 

Across our core risk management durations, here are the lines that matter to me most:

 

  1. Immediate-term TRADE resistance = 1530 (YTD closing high)
  2. Immediate-term TRADE support = 1504
  3. Intermediate-term TREND support = 1468

 

In other words, you’d rather buy them right than buy them at every price. That’s what we are trying to help you with – timing. I’d rather tighten up my net exposure here and wait and watch for 1504 to hold.

 

Overall, testing and holding 1502-1504 is what the bulls should want. Up every week builds exhaustion.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Less Bullish: SP500 Levels, Refreshed - SPX


European Banking Monitor: Italy’s Woes

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

Key Takeaways:

 

* European Financial CDS - Italian banks are wider on the political uncertainty with increases ranging from +19 to +34 bps. On a MoM basis, Italian banks are up 31 to 52 bps. Spanish banks are not far behind. Interestingly, while sovereign swaps in Germany and France were little changed, German and French bank swaps were notably wider WoW. Swaps widened by a median of 8 bps WoW among EU Financials, while equities were down by 3%. The MoM change in EU Financials is up to +13 bps. 

 

* Euribor-OIS Spread – The Euribor-OIS spread widened by 1 bps to 14 bps. While individual swaps are rising, the sentiment around systemic risk remains low, as evidenced by the very modest uptick in the Euribor-OIS spread.

 

* ECB Liquidity Recourse to the Deposit Facility – Likewise, ECB Liquidity Deposits fell by 13 billion euros last week. 

 -------

 

If you’d like to discuss recent developments in Europe, from the political to financial to social, please let me know and we can set up a call.

 

Matthew Hedrick

Senior Analyst

 

 

-------------

 

European Financials CDS Monitor – Swaps widened by a median of 8 bps WoW among EU Financials, while equities were down by 3%. The MoM change in EU Financials is up to +13 bps. Italian banks were wider on the political uncertainty with increases ranging from +19 to +34 bps. On a MoM basis, Italian banks are up 31 to 52 bps. Spanish banks are not far behind. Interestingly, while sovereign swaps in Germany and France were little changed, bank swaps among German and French banks were notably wider WoW.

 

European Banking Monitor: Italy’s Woes  - z. banks

 

Euribor-OIS spread – The Euribor-OIS spread widened by 1 bps to 14 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

European Banking Monitor: Italy’s Woes  - z. euribor

 

ECB Liquidity Recourse to the Deposit Facility – Deposits fell by 13 billion euros last week. The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  

 

European Banking Monitor: Italy’s Woes  - z. liquidity facility


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Less Bullish: SP500 Levels, Refreshed

Takeaway: Overall, testing and holding 1502-1504 is what the bulls should want. Up every week builds exhaustion.

POSITIONS: 9 LONGS, 7 SHORTS @Hedgeye

 

US stocks up for 8 of the last 9 weeks and failed to overcome the weekly closing high (1519) both into Friday’s close and on this morning’s open. Pretty low stress signal, but I want to respect it for what it is, for now. Overall research fundamentals are actually still improving.

 

Across our core risk management durations, here are the lines that matter to me most:

 

  1. Immediate-term TRADE resistance = 1530 (YTD closing high)
  2. Immediate-term TRADE support = 1504
  3. Intermediate-term TREND support = 1468

 

In other words, you’d rather buy them right than buy them at every price. That’s what we are trying to help you with – timing. I’d rather tighten up my net exposure here and wait and watch for 1504 to hold.

 

Overall, testing and holding 1 is what the bulls should want. Up every week builds exhaustion.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Less Bullish: SP500 Levels, Refreshed - SPX


MONDAY MORNING RISK MONITOR: ARE ITALY'S WOES HITTING U.S. FINANCIALS YET?

Takeaway: Neither Italy nor sequestration seem to be having much impact on U.S. Financials. Systemic interbank risk measures remains low for now.

Key Takeaways:

 

* European Financial CDS - Italian banks are wider on the political uncertainty with increases ranging from +19 to +34 bps. On a MoM basis, Italian banks are up 31 to 52 bps. Spanish banks are not far behind. Interestingly, while sovereign swaps in Germany and France were little changed, German and French bank swaps were notably wider WoW. Swaps widened by a median of 8 bps WoW among EU Financials, while equities were down by 3%. The MoM change in EU Financials is up to +13 bps. 

 

* Euribor-OIS Spread – The Euribor-OIS spread widened by 1 bps to 14 bps. While individual swaps are rising, the sentiment around systemic risk remains low, as evidenced by the very modest uptick in the Euribor-OIS spread.

 

* ECB Liquidity Recourse to the Deposit Facility – Likewise, ECB Liquity Deposits fell by 13 billion euros last week. 

 

* U.S. Financial CDS -  Mortgage insurers MGIC and Radian continued to tighten, improving 319 and 135 bps, respectively WoW, signaling that sentiment around the ongoing housing recovery is intact. The global U.S. banks were modestly wider WoW on rising concerns around Italy. 

 

* 2-10 Spread – Last week the 2-10 spread tightened to 164 bps, 12 bps tighter than a week ago. 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 3 of 12 improved / 6 out of 12 worsened / 4 of 12 unchanged

 • Intermediate-term(WoW): Positive / 6 of 12 improved / 3 out of 12 worsened / 4 of 12 unchanged

 • Long-term(WoW): Positive / 9 of 12 improved / 1 out of 12 worsened / 3 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: ARE ITALY'S WOES HITTING U.S. FINANCIALS YET? - 15 rm

 

1. U.S. Financial CDS -  Mortgage insurers MGIC and Radian continued to tighten, improving 319 and 135 bps, respectively WoW, signaling that sentiment around the ongoing housing recovery is intact. The global U.S. banks were modestly wider WoW on rising concerns around Italy. 


Tightened the most WoW: MTG, RDN, AGO

Widened the most WoW: MBI, MS, JPM

Tightened the most WoW: RDN, MTG, MET

Widened the most MoM: AON, MMC, BAC

 

MONDAY MORNING RISK MONITOR: ARE ITALY'S WOES HITTING U.S. FINANCIALS YET? - 1 rm

 

2. European Financial CDS - Swaps widened by a median of 8 bps WoW among EU Financials, while equities were down by 3%. The MoM change in EU Financials is up to +13 bps. Italian banks were wider on the political uncertainty with increases ranging from +19 to +34 bps. On a MoM basis, Italian banks are up 31 to 52 bps. Spanish banks are not far behind. Interestingly, while sovereign swaps in Germany and France were little changed, bank swaps among German and French banks were notably wider WoW.

 

MONDAY MORNING RISK MONITOR: ARE ITALY'S WOES HITTING U.S. FINANCIALS YET? - 2 rm

 

3. Asian Financial CDS - India widened while China tightened. Japan was mixed. 

 

MONDAY MORNING RISK MONITOR: ARE ITALY'S WOES HITTING U.S. FINANCIALS YET? - 17 rm

 

4. Sovereign CDS – Italian sovereign swaps widened sharply last week on Italian political uncertainty. Italy's swaps widened 36 bps WoW to 286 bps. Spain and Portugal were narrowly wider by 11 bps on sympathy. The rest of the world, however, moved little, with the U.S., Germany, France, Ireland and Japan all flat or narrowly tighter.

 

MONDAY MORNING RISK MONITOR: ARE ITALY'S WOES HITTING U.S. FINANCIALS YET? - 18 rm

 

MONDAY MORNING RISK MONITOR: ARE ITALY'S WOES HITTING U.S. FINANCIALS YET? - 3 rm

 

MONDAY MORNING RISK MONITOR: ARE ITALY'S WOES HITTING U.S. FINANCIALS YET? - 4 rm

 

5. High Yield (YTM) Monitor – High Yield rates fell 10.5 bps last week, ending the week at 5.98% versus 6.08% the prior week.

 

MONDAY MORNING RISK MONITOR: ARE ITALY'S WOES HITTING U.S. FINANCIALS YET? - 5 rm

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 0.6 points last week, ending at 1771.9.

 

MONDAY MORNING RISK MONITOR: ARE ITALY'S WOES HITTING U.S. FINANCIALS YET? - 6 rm

 

7. TED Spread Monitor – The TED spread rose 1.6 basis points last week, ending the week at 18 bps versus last week’s print of 16.4 bps.

 

MONDAY MORNING RISK MONITOR: ARE ITALY'S WOES HITTING U.S. FINANCIALS YET? - 7 rm

 

8. Journal of Commerce Commodity Price Index – The JOC index fell 0.8 points, ending the week at 9.08 versus 9.9 the prior week.

 

MONDAY MORNING RISK MONITOR: ARE ITALY'S WOES HITTING U.S. FINANCIALS YET? - 8 rm

 

9. Euribor-OIS Spread – The Euribor-OIS spread widened by 1 bps to 14 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

MONDAY MORNING RISK MONITOR: ARE ITALY'S WOES HITTING U.S. FINANCIALS YET? - 9 rm

 

10. ECB Liquidity Recourse to the Deposit Facility – Deposits fell by 13 billion euros last week. The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  

 

MONDAY MORNING RISK MONITOR: ARE ITALY'S WOES HITTING U.S. FINANCIALS YET? - 10 rm

 

11. Markit MCDX Index Monitor – Last week spreads widened by 1 bp, ending the week at 93 bps versus 92 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1. 

 

MONDAY MORNING RISK MONITOR: ARE ITALY'S WOES HITTING U.S. FINANCIALS YET? - 11 rm

 

12. Chinese Steel – Steel prices in China fell 2.0% last week, or 76 yuan/ton, to 3790 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: ARE ITALY'S WOES HITTING U.S. FINANCIALS YET? - 12 rm

 

13. 2-10 Spread – Last week the 2-10 spread tightened to 164 bps, 12 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: ARE ITALY'S WOES HITTING U.S. FINANCIALS YET? - 13 rm

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.9% upside to TRADE resistance and 1.5% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: ARE ITALY'S WOES HITTING U.S. FINANCIALS YET? - 14 rm

 

Joshua Steiner, CFA



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