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Positions: Long Germany via EWG, US Dollar (UUP); short Russia (RSX)

As Howard Penney noted in his morning strategy post, “Lingering Concerns” of sovereign debt issues have heightened the RISK AVERSION trade, globally. In Europe, arguable one of the main epicenters, European equities continue to be adversely affected by persisting concerns that governments will fail to meet their debt obligations.  Yesterday, Portugal joined “the club” to have its over-extended debt levels examined, causing the Portuguese equity market, the PSI 20 Index, to fall over 3%, while the country’s 10 year bond yield and sovereign CDS prices continue to shoot up to the right hand corner as investors demand increased premium to hold Portugal’s IOUs (see chart). Today we’re seeing follow-through selling from European equity markets, especially from the PIGS [Portugal, Ireland (or Italy or Iceland), Greece, and Spain].

Spain, long ailing from unemployment of near 20% and the bursting of its housing bubble, is positioning to prevent being the next debt poster child. Its Treasury sold $3.5 Billion of 3-year notes today yielding 2.63%, well above the 2.14% for similar notes issued in early December of last year.

What’s clear is that even if the combined GDP market share of Portugal, Ireland, Greece and Spain is only around 19% of Eurozone GDP (based on the latest figures from the World Bank), the periphery affects the whole. The last weeks have shown that the fears associated with the levered balance sheets of the PIGS put massive downward pressure on the Euro, which is now hovering around $1.38, and down 8.3% versus the USD since December 1st.  While we’re not implicitly short the Euro, we’ve been long the USD via UUP in our model portfolio to capture this movement.

With no great surprise, the ECB and BOE held rates steady at 1% and 0.5% today, and the BOE paused its $317 Billion bond-purchase program. With mounting banking issues and inconsistent results from its “quantitative easing” plans, we’re staying away from investment in the UK. In our portfolio we added to our long position in Germany (EWG), a low-beta play on a fiscally conservative state with manufacturing upside that stacks up against our higher-beta short position in Russia (RSX) that rhymes with our bearish intermediate term view on oil (USO), which we maintain despite covering USO this morning for a TRADE.

Matthew Hedrick
Analyst

Oink!: Greece isn’t the only concern - port