Hedgeye Portfolio: Long Germany (EWG); Long British Pound (FXB); bullish on EUR-USD
Today, Eurozone Industrial Orders disappointed forecasts on a month-over-month and year-over-year basis. The data is in line with our call for a slow-down in fundamental performance across most of Europe—a call we’re making over the intermediate term TREND and longer term TAIL as austerity measures drag down growth prospects across the region.
We’re however not bearish on Europe outright. As we noted in our post yesterday titled “The EU’s Guiding Hand”, we’re currently bullish on Germany, with the DAX outperforming many of the equity markets of its Western European peers, and bullish on the GBP and EUR versus the USD on a relative basis, as we see substantial downside in the USD and YEN, in particular. Our bullish intermediate term TREND lines for the Euro and Pound are $1.26 and $1.52, respectively.
Even off “easy” year-over-year compares of -24.7% in July 2009, Industrial Orders rose only +11.2% in July 2010, and undercut a forecast of +16.2% (see chart below). As a compare, June 2010 saw a rise of +22.7% year-over-year off a compare of -25.8%. Certainly as compares get harder into year-end and demand wanes, we’d expect Industrial Orders to slow further.
Over the immediate term TRADE to intermediate term TREND we expect European bond yields to continue to push to the upside as investors demand a yield premium to own the sovereign debt threats imbedded in European countries that are struggling to contain bloated sovereign debt and deficit levels. As an example, today, Portugal successfully issued €450 Million in debt due 2014 that commanded a yield of 4.695% versus a similar maturing bond issued on July 28th that commanded a yield a full 1% less.
While we see further downward pressure across European markets over the immediate term TRADE and intermediate term TREND, we’re comforted over the longer term TAIL that the EU community will effectively backstop the region to prevent another Greek default scare, a fact that should help to put in a moderate floor on the downside from here.