Investment Recommendations: short France (EWQ), EUR/USD (FXE) and Eurozone equities (EZU); Long GBP/USD (FXB)
This morning Keith added a short signal in France (via the etf EWQ) to our Real-Time Alerts. We’ve been waiting for an entry point on European equities, with major indices broken TREND for nearly two months in our model. We were afforded the opportunity today with ~ 50bp bounce in the EWQ as the CAC remains broken TREND and fundamentals support economic weakness ahead.
As Keith notes in the Real-Time Alert update:
“I make a lot of mistakes. One of them that I didn't make was re-shorting European Equities too early on the no-volume bounce. One big mistake I think the European Equity bulls are about to make is thesis drift. I don't know one PM who got long Europe because they thought European growth would slow and that the market would need another QE. Time to sell the most socialist of European economies, France.”
While we are closely following the Draghi Card, namely the pull-forward expectations of QE that he sent to the market in his Jackson Hole commentary (for more see Draghi Trumps Yellen’s Dovishness – Sticking with the Playbook), our call is simply that we do not see growth accelerating in Europe, and right here and now are not getting long equities simply on the prospect of QE. Instead we’re getting short a weak horse in the region, France.
Here’s our near term set-up on the region:
- Process: our TREND lines across major European indices remain broken = we’ll maintain a bearish bias on the equities
- Friday’s CPI Print: we expect Eurozone CPI (released at 5am EST this Friday) to tick down 10bps to 0.3% -- expect heightened investor expectations that Draghi needs more “powder” to revert falling inflation, however we do not see Friday’s print as the catalyst to issue QE at the September 4th ECB meeting
- September 4th ECB Meeting: we expect updated ECB staff projections to show downward revisions to growth and inflation. Draghi will “push” the growth and inflation prospects from TLTROs and QE-lite (ABS buying) programs in his commentary (although we are not buying it), and will leave QE in his back pocket
Weak Growth And Weakening. Last week’s Eurozone Q2 GDP print confirmed massive slowing for the region to 0.0% Q/Q (vs 0.2% prior) and 0.7% Y/Y (vs 0.9% prior) – and while both France and Germany slowed, our call is that France will underperform its main peer in the quarters ahead. Here’s the Q2 divergence:
France 0.0% Q/Q (0.1% est.) vs. 0.0% prior
France 0.1% Y/Y (0.3% est.) vs. 0.7% prior (0.8% revised)
Germany -0.2% Q/Q (-0.1% est.) vs. 0.8% prior
Germany 1.3% Y/Y (1.4% est.) vs. 2.2% prior
Supportive of today’s call is also survey data out that showed France Business Confidence declining in the August figure, its 4th straight month of declines; PMI Services and Manufacturing data that has shown France squarely underperforming the region since 2012 (largely below the 50 line indicating contraction); record-high jobless numbers; a 16-year low in housing starts; weak industrial production; low inflation (+0.5% Y/Y); and government bond yields falling steadily (down -1.2% Y/Y).
Politically Weak. Just two weeks ago France’s government cut its GDP forecast in half (again) to 0.5% (from 1.0%) for 2014 and it will likely miss its FY deficit target of 4%. News this week of President Hollande reshuffling his government (after Economy Minister Arnaud Montebourg stepped down on Monday), is confirming evidence to us that the policies of Hollande’s government are not on track to return growth to the economy over the medium term. That Hollande himself is wildly unpopular, with a paltry approval rating of 17%, furthers the outlook that the government’s pledge that the “recovery is there” is grossly disingenuous.