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Hedgeye Position: Long Germany (EWG), Long British Pound (FXB), bullish on EUR-USD; Short Italy (EWI)

Today, the final September figures for European Services PMI were released– and much like the European Manufacturing PMI figures issued last week, in aggregate there is a slowdown in the September numbers for the major economies, which is in line with our forecast for weaker European economic data in the back half of 2010 (see chart below). It’s important to note that both Spain and Ireland fell comfortably below the 50 mark, the line dividing contraction (below 50) and expansion (above 50).

European PMI Services Slow in September - p1

This data is in line with our call for divergences among European countries, similar to our Sovereign Debt Dichotomy theme in 2Q10. Currently we are bullish on Germany and continue to warn of further deterioration in the capital markets of countries like Portugal, Ireland, Italy, Greece, and Spain. [Greece leads global equity markets on the downside, currently at -31.5% YTD. 

The data also suggests that Services were slightly more resilient than Manufacturing.  Concurrently, as austerity measures and civil unrest weigh on confidence and consumption, a separate survey shows today that Eurozone retail sales fell 40bps in August versus the previous month, and have been trending lower over the last months (see chart). We think this downturn in the data is being reflected in Europe’s equity markets, with today only the first day in seven that most are up.

European PMI Services Slow in September - p2

We are still bullish on the EUR-USD, despite the ongoing sovereign debt contagion threats across the Eurozone, with a TRADE (3 weeks or less) range of $1.35-$1.38. The EUR-USD is on a tear intraday, up 1% at $1.3827. Stay tuned for our positioning as the level violates our TRADE level of resistance.   

Our TRADE levels on the British Pound-USD are $1.56-$1.59 with TREND line support (3 months or more) at $1.54, and outlined in the chart below.

Matthew Hedrick


European PMI Services Slow in September - p3