Research Edge Position: Short UK (EWU)
From our seat we’ve watched European fundamentals slow sequentially over the last months while unemployment (9.8%) and inflation (est. +0.6% in Nov. Y/Y) have accelerated moderately across the region. Although we’ve seen little rhetorical movement in monetary policy from the ECB to raise rates, the bank’s recent announcement to withdraw its emergency stimulus measures has accelerated investment risk for countries with levered balance sheets. In particular, and combined with the news from Dubai World, countries like Greece and Turkey (and even some Eastern European countries that remain levered to Western European banks and foreign currency) have seen manic swings in their equity markets over the last two weeks, while other markets like Russia (RTSI) have corrected from frothy YTD highs.
As the largest economy in the Eurozone, the German economy remains an important proxy for regional health. As the graph below depicts, Factory Orders have slowed sequentially over the last months and although rising on an annual basis, they are still well off historical levels. We attribute this trend in particular to the expiration of country’s cash-for-clunkers program, a strong Euro, and increased fears associated with future joblessness.
While we’re on balance bullish on the German economy over the intermediate to long term, our stance on the UK remains bearish and we’re short the etf EWU in our virtual portfolio.