Hedgeye Portfolio: Long Germany (EWG); Long British Pound (FXB); bullish on EUR-USD
We thought we’d flash you a couple charts of Portugal, one country alongside Greece that is failing to meet its debt and deficit reduction targets for 2010, with Portugal’s Finance Minister saying today that it’s likely its budget gap will equal 9% of GDP by year-end, well above its target of 7.3%.
Our call on European debt and deficits threats remains one that is duration sensitive. We think that for the near term TRADE and intermediate term TREND there’s plenty of downside for Europe’s fiscally weaker countries, especially those “affectionately” labeled the PIIGS. We highlight the risk trade with Portugal in the charts below: (1.) yields on the 10YR Portuguese bond are rising above those last seen at the height of concern over Europe’s sovereign crisis, which culminated in the issuance of a €750 Billion rescue package on May 9th; and (2.) CDS is breaking out to the upside to a critical inflection line of 400bps, a line we initially discuss in late ’09 and 1H10 in regards to risk parameters for Greek default. Certainly, Portugal is now flirting with this line.
We’re also quick to point out that Greece’s default scare and the associated shock to the Euro put enough fear into the European community that we’d expect the EU to remain a backstop to support the Union at all costs should sovereign default fears rear its ugly head again. Recent data also helps to substantiate that a moderate floor could be in place, as Norway’s sovereign wealth fund (the 2nd largest in the world) decided to buy an undisclosed amount of Greek, Spanish, Italian and Portuguese debt a week ago, a bet that the EU will continue to feed its children the bottle during any time of need.
Again, we expect the inability of countries to cut deficit and debt levels to present further downward pressure on markets, however not to the extent that Greece did. Therefore, we’re “surprisingly” bullish on the EUR-USD, given where we were 3-6 months ago, and outright bullish on the Pound-USD. Our bullish intermediate term TREND lines for the Euro and Pound are $1.26 and $1.52, respectively.