ECB on Hold, EUR Pressured

Takeaway: ECB rates unchanged on Thursday and EUR/USD continued downside pressure alongside Italian election uncertainty.

Positions in Europe: Short France (EWQ)

ECB on Hold

On Thursday the ECB’s governing council convenes; we expect no change to the main interest rates. Our rate position is largely in agreement with consensus -- 44 of 48 economists polled by Bloomberg expect no change.


This position is grounded in recent data that is supportive of an “accommodative” hands off approach from Draghi – CPI came down over recent months and is resting steady at 2.0% Y/Y in FEB, exactly at the ECB’s targeted level. PMIs across the core fell in FEB vs JAN, but beat initial expectations. While the Eurozone unemployment rate ticked 10bps higher to 11.9% in the month, the rate has historically been higher than the U.S.’s and is tame compared to peripheral figures.  In February Eurozone confidence figured improved, as did retail sales to -1.3% JAN Y/Y (exp. -2.9%) vs -3.0% DEC and industrial production improved to -2.4% DEC Y/Y vs -4.0% NOV.


Further, Draghi’s positioning has the added support from the conclusions of the Eurozone finance ministers meeting (on Tuesday), which was dovish, promoting a willingness to extend country deficit reduction targets due to the “pains” associated with austerity.

  • Specifically, EU Economic and Monetary Commissioner Olli Rehn had this to say: “the economic strains may also justify in a certain number of cases reviewing deadlines for the correction of excessive deficits.”
  • Of mention is that France’s deficit target of 3% looks to be pushed from 2013 to 2014.

While we think that investor sentiment is lower on the region currently due to concerns over Italy – as compared to the optimism in the back half of 2012 following the announcement of Draghi’s OMT –– we expect Draghi to keep his policy powder stowed on Thursday until there is a more meaningful flair-up in risk or greater change to the underlying data the bank tracks.


ECB on Hold, EUR Pressured - z. ecb rates




Broadly we think the uncertainty around the next Italian government will put downside pressure on the EUR/USD. Further, we think that given the power of social media and the strong popular support for Beppe Grillo’s Five Star Movement, his call for an online referendum on Italy’s membership in the EUR could put further downside pressure on the cross. 


Our critical quantitative lines on the EUR/USD (which can be played via the etf FXE) are outlined in the chart below:


ECB on Hold, EUR Pressured - zz. eur usd


The most recent weekly CFTC data (from 2/26) shows a decided swing into a net bearish position on the EUR/USD, with a steady decline since a recent bullish peak on February 5th, which we think primarily reflects the uncertainty coming into the Italian election on February 24-25. We expect a long runway of uncertainty on the next Italian government, with the first semi catalyst not coming until March 15th when the presidents of the lower and upper houses are expected to be elected. 


ECB on Hold, EUR Pressured - z. cftc


Matthew Hedrick

Senior Analyst

More Bullish: SP500 Levels, Refreshed

Takeaway: Above 1519 (weekly closing high), the US stock market is more bullish; below it, less bullish. Risk changes fast.

Tops are processes, not points.


That’s certainly not to say we’ve reached the peak of the domestic equity market, however.


Rather, it’s a less-than-subtle reminder – especially to all those who are trying to make their respective careers by calling for what could eventually amount to the third major top in the US equity market of the past ~13 years – that risk can get exhausted in both directions – particularly when the fundamental research signals continue to confirm the price trends.


On the fundamental research front, the recent string of domestic economic data has been quite confirming of our 1Q13 Macro Themes – particularly our #GrowthStabilizing and #HousingsHammer views:


  • ISM Manufacturing PMI: 54.2 in FEB from 53.1 in JAN; New Orders up +4.5ppts. MoM to 57.8
  • ISM Non-Manufacturing PMI: 56 in FEB from 55.2 in JAN; ; New Orders up +3.8ppts. MoM to 58.2
  • Conference Board Consumer Confidence Index: 69.6 in FEB from 58.4 in JAN
  • University of Michigan Consumer Confidence Index: 77.6 in FEB from 73.8 in JAN
  • Correlogic Nationwide House Price Index: +9.7% YoY in FEB from +9.7% in JAN; the +11.3% rate of YoY appreciation in non-distressed properties was the fastest pace since 2009


As a reminder, the key takeaways from the aforementioned themes were (as it pertains to domestic financial markets):


  • LONG Domestic Equities (up over +8% YTD)
  • SELL/SHORT Fixed Income (UST 10Y yield up around +14bps YTD)
  • LONG US Dollar (DXY up around +3% YTD)
  • SELL/SHORT Commodities (CRB Index down more than -1% YTD)


For now – and ostensibly forever – sticking to the #process trumps making newsy, analytically-reckless market calls. Moreover, our #process is specifically designed to help our clients accomplish three things:


  1. Manage immediate-term market risk;
  2. Front-run intermediate-term trends; and
  3. Contextualize long-term cycles with a broad range(s) of economic history.


Process is king and our process continues to support maintaining a bullish bias on the US equity market.


Darius Dale

Senior Analyst


More Bullish: SP500 Levels, Refreshed - SPX

Auto Sales: The Housing Effect

The rebound in automobile sales has felt very slow, but looks sharp on the chart below.  With housing rebounding and employment generally improving, consumer durable sales have improved.  Note that the series is only about 15% away from its historical average on a monthly SAAR basis. Interestingly, the uptick in auto sales coincides with the recovery in the housing market. New home sales also have a long way to go before they reach even low historical norms, but housing is on the road to recovery and has been a key component of our macro global growth thesis.


Auto Sales: The Housing Effect - r6


Auto Sales: The Housing Effect - r7


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Dealing With It

Yesterday, we bought Chinese equities via the Morgan Stanley China A Share Fund (CAF) ETF. While the position ended up going against us, we did our homework and still believe that being long Chinese equities makes sense from the TREND and TAIL durations that we work with. With China targeting +7.5% GDP growth and CPI at +3.5%, our thesis is emboldened by these numbers. The waiting game can be hard to deal with sometimes, but you have to know when to suck it up and play the cards you're dealt.

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Company Ticker Sector Duration

We believe ASCA will receive a higher bid from another gaming competitor. Our valuation puts ASCA’s worth closer to $40.


With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.


HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

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"We didn't know that Vornado was going to sell 9mm shares, but clearly someone did yesterday $JCP" -@HedgeyeDJ


"You can pretend to be serious; you can't pretend to be witty." -Sacha Guitry


Dow Jones Industrial Average just 36 points away from all-time closing high of 14,163.

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