Refreshing the European Charts

Where are we at in Europe? We expect European equity and credit markets to trend sideways in the summer months, short of any blow-ups we could see from Italy, Portugal or spillover from Greece. We do not see any particular catalysts ahead: we’re forecasting the ECB to be on hold in wait-and-watch mode to see if economic conditions improve in the fall. Headline risk should remain a governing factor. Here we highlight Italy – both the tenuous nature of the existing coalition along with fears around its inability to establish a budget for next year. Sentiment could shift given the likelihood that the country delays a one percentage point hike (from 21% to 22%) in the VAT that was scheduled to take effect in July for at least three months.

 

Recent Italian sovereign bond issuance has priced debt higher versus previous auctions, a new development for the periphery versus year-to-date performance of mostly lower issuance. However, we expect both Italy and Spain, despite fluctuations, to remain grounded under 5% on the 10YR.  Draghi’s OMT put remains a force behind this call.

 


Another EU Summit completed—what was accomplished?   

  • EU leaders increase the funds set aside to combat youth unemployment to at least €8B from a previous target of €6B.

Hedgeye Takeaway:  While this funding is a start, the structural imbalances across the Eurozone, especially the need for labor market reform, will take years to amend, with no guarantee of success. We think the alarming rates of unemployment (Eurozone at 12.2%), especially youth unemployment that is above 50% across some peripheral states, will continue to guide long-term below-mean growth.

  • There were discussions around proposals by the European Investment Bank (EIB) and European Commission (EC) to generate €55B-€100B of new loans to small and medium sized enterprises (SMEs).

Hedgeye Takeaway: The ECB has had no success unclogging the credit channel. Loans to the SMEs are critical to restart and encourage lending; however we have our doubts on this sum given the unsuccessful LTRO packages that handed out 1 Trillion EUR in nearly free money.

  • Discussion around a framework for the Banking Union, including that bail-in agreements will exempt deposit holders of less than €100K.

Hedgeye Takeaway: Following Cyprus, Eurocrats are incentivized to ensure that deposit holders with less than €100K in deposits are not on the hook for a bail-in. We expect more guidelines on the shape of a Banking Union after German elections in September.


 

Data: The Haves versus the Have Nots


Continuing with our thesis on the region, the data out this week reminds us that our bullish bias on Germany versus our bearish bias on the periphery remains intact. 

  • Eurozone Confidence – figures will grind slightly higher throughout the summer, led by Germany.

Refreshing the European Charts - yy. euro econ vs consumer

 

Refreshing the European Charts - yy. euro manu vs service

 

Refreshing the European Charts - yy. euro business

 

 

Bullish Bias – Germany

  • Figures this week all looked better. The Unemployment Rate remained at 6.8% in JUN with the Unemployment Change down-12K to 2.94MM. The GfK Consumer Confidence survey rose to 6.8 JUL (exp. 6.5) vs 6.5 JUN. Retail Sales remain positive at 0.4% MAY Y/Y vs 2.7% APR and CPI rests at a healthy 1.9%  in JUN (Preliminary) Y/Y vs 1.6% MAY

Refreshing the European Charts - yy. germany cpi

 

 

Bearish Bias – The Periphery


Retail Sales fell across the periphery: Spain -4.5% MAY vs -2.6% APR; Greece -14.7% APR Y/Y vs -5.9% MAR; and Portugal -3.5% MAY Y/Y vs -2.1% APR.  Data across Italy continues to be atrocious, and Italy Economic Sentiment fell to 76.1 JUN vs 80.2 MAY. Also, Spain’s housing market continues to feel the hit, with the Total Housing Permits down -16.5% APR vs -35% MAR.

 

Refreshing the European Charts - yy. italy retail sales

 

Refreshing the European Charts - yy. spain housing

 

Enjoy the weekend,

 

Matthew Hedrick

Senior Analyst


Cartoon of the Day: 'Biggest Tax Cut Ever'

President Donald Trump's economic team unveiled what he called last week, "the biggest tax cut we’ve ever had.” Before you get too excited about that hang on a sec. "Trump Tax Reform ain’t gettin’ done anytime soon," Hedgeye CEO Keith McCullough wrote in today's Early Look.

read more

Neurofinance: The Psychology Behind When To Sell A Bull Market

"Most momentum investors stay invested too long, under-reacting and holding tight after truly bad news finally arrives to break the trend," writes MarketPsych's Richard Peterson.

read more

Energy Stocks: Time to Buy the Dip? | $XLE

What the heck is happening in the Energy sector (XLE)? Energy stocks have trailed the S&P 500 by a whopping 15% in 2017. Before you buy the dip, here's what you need to know.

read more

Cartoon of the Day: Hard-Headed Bears

How's this for "hard data"? So far, 107 of 497 S&P 500 companies have reported aggregate sales and earnings growth of 4.4% and 13.2% respectively.

read more

Premium insight

McCullough [Uncensored]: When People Say ‘Everyone is Bullish, That’s Bulls@#t’

“You wonder why the performance of the hedge fund indices is so horrendous,” says Hedgeye CEO Keith McCullough, “they’re all doing the same thing, after the market moves. You shouldn’t be paid for that.”

read more

SECTOR SPOTLIGHT Replay | Healthcare Analyst Tom Tobin Today at 2:30PM ET

Tune in to this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more