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Erik Nielsen's Latest European Stick Save Attempt

Tyler Durden's picture




 

Happy Saturday,

Before heading off to a week of meetings in Washington, New York and Boston, here are my thoughts on Europe from hot and wonderful Chiswick:

  • Another week of market discomfort, starting with renewed concerns about European (mostly Spanish) banks (which I don’t fully share), and ending with “contagion” from the US.
  • Meanwhile, European real-economy data continue to come in just fine; the latest Euro weakness will contribute to more of the same.
  • The new Hungarian government claimed that the inherited deficit is bigger than expected and that they are on the brink of default, crazy statement for domestic consumption, but utterly irresponsible in the present market environment.
  • Merkel and Medvedev spent the last two days talking about German contributions to Russia’s further modernisation – as well as foreign policy issues.
  • This coming week will see the first hard data for Q2 – industrial production for April  - in several countries, including several Euro-zone members; we expect a general easing in the growth rates, but still good.
  • The ECB meets on Thursday (no big news) and further work on the SPV will take place Monday-Tuesday.
  • The UK also publishes April IP numbers; probably down a tad after recent months’ strong gains.
  • Sweden is also set to print a small slowdown in industrial production after a very robust March.
  • Norway will publish manufacturing production (we expect a small decline) and we’ll get Norges Bank’s regional survey. 
  1. The great battle between, on the one side, nervous financial markets, and on the other side, good improvements in the real economy and policymakers working to restore confidence, continued this past week.  But as illustrated by the price action yesterday, this is not just a European problem; rather yesterday’s sell-off was clearly triggered by the weak job data out of the US.  Before that, financial markets here in Europe seemed to get increasingly nervous again about European banks in spite of further progress on mergers in Spain and new promises of further stress tests by July.  I maintain my view that markets are overly concerned about Spanish banks (and about Spain in general) and that people tend to underestimate the recent acceleration in the changes in this space.  This past week’s mergers of cajas is only one such illustration; I expect a month or two of rapid (positive) change among Spanish banks.  Also, we got pretty good news out of G20 in Korea with reports of broad agreement on the need to delay the new banking rules (although disagreement remains on several technical aspects.)  All said and done, we are in one of those phases where I just don’t really get the equity market.  As my colleague Peter Oppenheimer has illustrated, European equities are pretty cheap if you employ just a minimal degree of common sense in terms of staying away from those most exposed to domestic demand in the periphery.  Meanwhile, German government borrowing costs reached new lows, and while other sovereign spreads – now focused on the bigger and better rated ones – widened, absolute funding costs for the sovereigns remain at very low levels.  There is tons of liquidity out there, there are plenty of good real economy stories of improving demand, and yet, investors prefer negative real returns.  This cannot last.
  2. A number of people explained to me that Friday’s stock market action was caused by the lack of job creation in the US.  Well, I noted the timing, but has the market totally forgotten that job creation is a lagging indicator of growth and earnings?  Moreover, here in Europe we are through another week of pretty good data on the macro side.  Euro-zone GDP and the good PMIs for May were broadly confirmed.  Bank lending to households continued to increase very nicely in April, while lending to non-financial corporate still sit pretty flat in line with historical evidence of lending coming out of recession.  And when it comes to the drag from fiscal consolidation, as Natacha Valla and Jeremie Cohen-Setton illustrated in Thursday’s European Weekly Analyst, this will easily be outweighed by the weaker Euro.  But just as I struggle with the equity market, I don’t get the FX market these days.  While I understand the technical and position-based arguments for the FX levels, on fundamentals, I don’t know why the Euro has remained overvalued for so long.  That said, the triggers for moves are amazing:  On Thursday, markets basically ignored the man with the world’s single biggest portfolio, Chinese central bank governor Zhou Xiaochuan, when he expressed full trust in Europe’s ability to deal with its debt crisis, while going into a virtual panic sending EUR/USD below 1.20 for the first time since March 2006 when the wire services botched the simple job of translating French PM Fillon’s statement on the FX.  But here is the most fundamental of questions: How can one be bearish on both the Euro and on Euro-zone growth?  Beats me – I assume you know which camp I am in. 
  3. But while good policymakers work hard to restore the necessary confidence in markets, others make me really nervous.  On Thursday, the Hungarian government pulled that same old trick out for a new government that we most recently saw employed in the UK, and multiplied it many times over, by declaring that things are much worse than expected.  Fidesz vice-president Kósa claimed that Hungary stands on a brink of a sovereign default due to its precarious budget situation and continuously appearing 'skeletons' in the fiscal accounts.  And in spite of the predictable market reactions, a spokesman for PM Orban basically repeated the same assessment yesterday.  As Magda Polan argued in her note, these comments were clearly intended for domestic consumption and were used to build a dramatic backdrop that would let Fidesz backtrack on a large share of its campaign promises and broadly continue with the fiscal policies of the previous government.  The larger deficit-to-GDP numbers they referred to were not generated by measurably greater HUF-denominated deficit projections, but by (unrealistically) lower GDP numbers.  In my opinion, these were rather irresponsible statements, and unless they get clarified, in addition to raising the government’s funding costs, and adding to their debt levels (via the FX depreciation) – talking about shooting yourself in the foot, anyone? - next week might well see an unnecessary revival in market anxiety about Austrian banks etc.  Seen from a broader pan-European perspective, this is just the latest in a series of unfortunate statements by the new Hungarian government; on the back of earlier “patriotic” (read: nationalistic) statements, the FT’s Tony Barber discusses in his excellent Brusselsblog the uncomfortable prospects of Hungary taking over the EU presidency in six months.
  4. Yesterday and today saw the latest of the regular meetings between the heads of state of Germany and Russia.  Merkel and Medvedev met at Schloss Meseberg north of Berlin.  Following weeks of meetings with her European partners all focused on getting Germany to lend and guarantee hundreds of billions of German taxpayers’ Euros to keep the European project on track, it must have been a relief for her to meet with Medvedev who basically came to seek a framework for a substantial increase in Russian purchases of German knowhow and products to help modernize Russian public infrastructures.  As far as I understand, policy wonks are busy trying to link such commercial interests between the two sides with a host of human rights and foreign policy objectives.  (Reportedly, the Middle East, Iran and North Korea were also discussed.)  I am all for greater policy coordination towards the world’s hotspots as well as global respect for human rights the way most of us Europeans and Americans think of this important issue, but expanding commercial interactions is indeed a great way of getting started.  As I have argued before, this space of German-Russian interactions is worthwhile watching rather carefully, and never more so than now when intra-EU relations are stressed. 

Looking at this coming week:

  1. The Euro-zone will see its first hard data for Q2 roll in this coming week, namely in the shape of national industrial production numbers for April; they all have EMEA-Map relevance scores of 5.  Our leading indicator of IP for the Euro-zone as a whole suggests some general slowing of momentum at the present robust level, although this will likely be reflected to varying degrees in the individual countries.  Spain already reported flat April IP growth on Friday (following the 2.1%mom gain in March; not so bad for an economy most people think is falling off the edge of the cliff).  The rest of the national numbers starts on Tuesday with Germany where we expect a handsome +2.0%mom (after +4.0% in March)   In France and Italy (both out Thursday), we foresee a gain of +0.2% mom, down from April’s +1.0% rise in France, but up from a weaker March reading in Italy.
  2. On Tuesday, the ECB will reveal its sovereign debt purchases for this past week.  Up until a week ago they had bought €40bn (reportedly all in Greece, Portugal and Ireland) with slightly less each week since the start.  I am guessing that they bought €5-8bn last week, but we’ll see.  In the bigger scheme of things, it surely continues to be peanuts, but I suspect that they’ll begin to more seriously phase out the purchases once the SPV is functional, probably in some three weeks (meetings Monday-Tuesday to sort out technical details).  On Thursday we’ll have the regular monthly ECB meeting.  I’ll watch it (from NY), but I suspect it’ll be pretty boring: There’ll be no change in policies, of course.  They’ll probably revise marginally higher their growth and inflation forecast for 2010 and 2011, and Trichet will mention the words “exit strategy” several times, but I very much doubt that he’ll give anything concrete away at this stage – why should he?  Finally, the German constitutional court will decide within the next week or two whether to impose an injunction against the €123bn German contribution to the SPC following the filing by CSU MP Gauweiler.  The court has not said when they’ll decide on the issue of an injunction, and I am no legal expert so I won’t make a prediction what they’ll do.  But as Dirk Schumacher has noted, the court rejected an injunction against the EU package to Greece, so it might be somewhat surprising if they were to stop the SPV contribution while they decide on its legality.  The final ruling on both the Greek package and the SPV contribution will likely take several months.
  3. In the UK, the MPC also meets on Thursday and will (also) leave policy (rates and QE) unchanged.  Apart from that we have three ONS releases and two surveys this coming week.  Like in the Euro-zone, the main release will be industrial production in April, on Friday.  After two blowout months in February and March, when output grew by 3.7%, we expect a small drop in April (-0.1%mom), despite the continuing strength of surveys; consensus is at +0.5%mom.  Trade data are similarly noisy and, after a dip in services exports and a rise in goods imports in March, we expect a partial reversal in April (the numbers are released on Wednesday) and a drop in the goods and services deficit from £3.6bn to £3.0bn (consensus expectation  £3.0bn).  Also out on Friday, at the same time as the IP numbers, are producer prices for May.  These have shot up in recent months (by 3% since the start of the year), not least because of the weaker sterling, but also as a result of higher global commodity prices.  We are just about in line with the consensus view on “core” output prices (+0.5%mom versus +0.4%mom) but, thanks to the decline in oil prices, below it on headline inflation (-0.1%mom versus +0.5%).  Finally, we’ll be keeping an eye out for the two surveys this week, the BRC Retail Sales Monitor and Markit’s Report on Jobs.  Ben Broadbent has observed that the latter, which has performed well as a leading indicator in its (admittedly limited) history, remains extremely strong, consistent with accelerating rates of pay, growing vacancies and annualised jobs growth in excess of 1% in the private sector.  But he is wondering if this can continue.  The Report on Jobs is out on Wednesday.  The BRC survey is published earlier that morning and is particularly important to watch following the sharp drop in the other main retail survey in May, the CBI Distributive Trades Survey (the main balance fell from +13 to -18).  A CBI reading of -18 equates, on past correlations, to a like-for-like BRC sales figure of around +0.5%.
  4. It’ll be a relatively quiet week in Sweden.  Following a very strong rise last month, we expect IP data (Wednesday; EMEA-MAP relevance score of 3) to come in a little below consensus (+0.5%mom vs. 1.0%mom).  We are in line with consensus on the CPI data (Thursday – 2.8%yoy).
  5. There are three data points of note in Norway this coming week.  First, manufacturing production (E-Map 4) for April on Monday should show a small contraction (-0.2% mom, consensus +0.2%mom). Manufacturing activity has expanded for the last two months, and so a flattish print would be consistent with moderate growth.  Second, as important will be the latest Norges Bank Regional Network Report on Wednesday.   There is no consensus survey for this, but we expect to see a picture of accelerating, but still moderate, activity growth – the previous report in March showed a slowdown in activity at the start of the year. This report is an important input into Norges Bank’s view of real activity in Norway.  Finally, we’ll get inflation for May on Thursday.  We expect CPI-ATE inflation to decline to 1.5% from 1.7%; consensus expects a slightly more modest decline to 1.6%.

… and that’s the way Europe looks to me on this gorgeous Saturday evening under my cherry tree in my backyard (no, they are still far from ripe yet.)

Erik Nielsen

 

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Sun, 06/06/2010 - 21:07 | 398629 nmewn
nmewn's picture

There are times I actually feel sorry for communists...not often...just sometimes.

Mon, 06/07/2010 - 05:18 | 399188 dcb
dcb's picture

Got to love the guy. the maniging director at goldman is the guy who has no problems talking one thing to the public while the trading desk does the opposite. strange how the desk can have no loosing days whlie their advice has no problem doing so?

my favorite quote is this:

The new Hungarian government claimed that the inherited deficit is bigger than expected and that they are on the brink of default, crazy statement for domestic consumption, but utterly irresponsible in the present market environment.

 

God forbid people in office should actually tell the truth. But then again maybe goldman had a hand in selling bonds for hungary and hiding the truth just like they did for greece.

My  only conclusion is that these people are so isolated from the real world they manage to ive theor lives i in some sort of fictional bubble of their own creation.

Sun, 06/06/2010 - 21:10 | 398637 M31Capital
M31Capital's picture

What a sweet gig this guy has, gets paid a few bars a year to hobnob around Europe, be the voice of caution as the sovereign debt crises emerged, then does a classic sell side U-turn as he gets the tap on the back to change his tone as things get really ugly.  Just another reason to throw most of what he says in the bin.  

Sun, 06/06/2010 - 21:14 | 398645 Henry Chinaski
Henry Chinaski's picture

Our cherry tree finally died a few years ago.

Sun, 06/06/2010 - 21:26 | 398667 Noah Vail
Noah Vail's picture

You must really hate yourself to read crap like that.

Sun, 06/06/2010 - 21:19 | 398656 williambanzai7
williambanzai7's picture

The Squids have ordered their talking heads to ingratiate the Eurocrats, while the traders do the black box.

Sun, 06/06/2010 - 22:33 | 398805 I need more asshats
I need more asshats's picture

Clearly. But I think it's black boxes. The fifth branch becomes the one branch, one big branch.

Sun, 06/06/2010 - 21:24 | 398663 Trimmed Hedge
Trimmed Hedge's picture

Futures are melting... MELTING....!!!!

Sun, 06/06/2010 - 21:44 | 398712 Muir
Muir's picture

What you selling?

Sun, 06/06/2010 - 21:25 | 398666 reading
reading's picture

The cherries coming off the tree might be the only thing Erik has left to talk about soon. What a twit.

Sun, 06/06/2010 - 21:27 | 398668 Howard777
Howard777's picture

This guy needs to take of the rose tinted shades and smell the coffee in his luvely Chiswick pied a terre. He is totally bought into the system hence he quickly paints over the troubling things (like that big iceberg the ship is heading towards) and is happy clappy about  spring being in the air and how great  things are getting in the "recovery". He cannot entertain the possibility in his head that the system is in "Tilt" and this time now is the odd calm feeling just before we slide over the niagra falls.

I get it now, this guy is thinking that everything is rosy as he thinks from his banks point of view. He isnt speaking from the banks' clients point of view. Now i get it!

Sun, 06/06/2010 - 21:37 | 398693 Turd Ferguson
Turd Ferguson's picture

This fucking Nielsen guy is a complete and utter douchebag.

I'd like to shove his cherry tree directly up his fat ass.

Sun, 06/06/2010 - 21:41 | 398704 Howard777
Howard777's picture

We could safely say that would definitely pop his cherry.

Sun, 06/06/2010 - 21:54 | 398732 zen0
zen0's picture

Mr. Ferguson: I would just like to say that one of the reasons I went through hell to post here is that any site that would allow you to post under your Avatar and name must be a good place to be. I have told my family that you are my new financial Guru, and haven't heard from them since.

Sun, 06/06/2010 - 22:04 | 398747 Turd Ferguson
Turd Ferguson's picture

I have lists of clients for whom I have generated $3000 loss carry-forwards that will last till the 22nd Century. Perhaps your family is considerably more wise than you.

Sun, 06/06/2010 - 21:44 | 398714 SuckerForum
SuckerForum's picture

Federal Reserve Stick Save??

Meeting scheduled for 11:30 AM tomorrow under expediated procedures

http://www.federalreserve.gov/boarddocs/meetings/2010/20100607/advancedexp.htm

Sun, 06/06/2010 - 21:47 | 398718 AN0NYM0US
AN0NYM0US's picture

ya they're going to lower rates

Sun, 06/06/2010 - 21:54 | 398733 masterinchancery
masterinchancery's picture

I'm holding out for Banana Ben to pay me 5% for accepting a Fed loan.

Mon, 06/07/2010 - 07:28 | 399261 Hephasteus
Hephasteus's picture

I'm waiting for the print your own money kit that only costs 10 ounces of gold. And an ounce for each inkjet cartridge. So pretty much the same deal JP Morgan Chase is getting.

Sun, 06/06/2010 - 21:51 | 398716 AN0NYM0US
AN0NYM0US's picture

Happy Sunday...

 

Erik in the real world the response to a knob who uses such an expression is something to the effect of,  F-off ahole. Nothing personal mind you, but you seem preoccupied with the superficiality of your circumstance as opposed to the substance of your message. f-ing knob

Sun, 06/06/2010 - 21:48 | 398720 zen0
zen0's picture

On Thursday, markets basically ignored the man with the world’s single biggest portfolio, Chinese central bank governor Zhou Xiaochuan, when he expressed full trust in Europe’s ability to deal with its debt crisis ---Nielsen

 

Maybe he just didn't notice that Zhou Xiaochuan was rolling his eyes during his statement because....well, you know.

Sun, 06/06/2010 - 21:56 | 398736 masterinchancery
masterinchancery's picture

Unlike Gordan Brown, Zhou doesn't talk down his book.

Sun, 06/06/2010 - 22:05 | 398749 Mactheknife
Mactheknife's picture

+10 Nailed it.

Sun, 06/06/2010 - 22:09 | 398754 buzzsaw99
buzzsaw99's picture

...but has the market totally forgotten that job creation is a lagging indicator of growth and earnings? 

 

egad

Sun, 06/06/2010 - 22:10 | 398757 aint no fortuna...
aint no fortunate son's picture

Still with the heroin, eh Erik? Ooohhh, I'm puking and its soooooooo much fun....

Sun, 06/06/2010 - 22:17 | 398766 M.B. Drapier
M.B. Drapier's picture

So, this SPV:

The idea of the SPV emerged in May as a way to help euro zone countries to which markets effectively refused to lend like recently in the case of Greece.

But unlike in the case of Greece, it would be the SPV that would borrow on the market against guarantees issued by all 16 members of the single currency area.

In Greece's case, each of the euro zone countries has to go to the market and raise the money individually to extend bilateral loans to Athens.

I wonder when we can expect to hear outrage from ECB vice-president Vítor Constâncio?

Sun, 06/06/2010 - 22:24 | 398777 Artful Dodger
Artful Dodger's picture

I'm writing today's update from my van down by the river. My 300-baud satellite modem and delayed quotation system suggest that the euro may have already seen its lows last week. My EuroTrash-Zone target is 1.28, and with the 3-day delayed quote showing 1.21, a stop at 1.2098 is prudent here. If the stop hits, presume I've turned bearish, but if you'd have been better off not having a stop, presume I'm bullish again. AutoZone is my Self-Conflicted Pick of the Week. The van is not running on all cylinders, shall we say, and I expect its needed replacement parts to add incremental EPS of 0.0000017. AutoZone was trading at 193.75 three days ago, and my price target based on discounted clash flow and van repairs remains 193.78. If, like me, you are unable to purchase a share, consider joining our investment club, which meets under the bridge at 7:30s Tuesdays and Thursdays. Bring guns, rubbers, and your best stock picks! Signs of Gulf oil are showing up where I fish, so I'd better sign off. Until next time, I wish you didn't exist, you filthy low-net-worth scum (er, I was talking to the oil, of course).

Sun, 06/06/2010 - 22:44 | 398814 Lux Fiat
Lux Fiat's picture

 But here is the most fundamental of questions: How can one be bearish on both the Euro and on Euro-zone growth?

'Cause if the economies don't grow much (or more likely, contract), their slim chance of being able to grow into affording their debt, or cutting back gov't spending without tanking their economies, just dropped to that of a snowball in Hades.

Thanks ZH for the daily (or nightly) dose of humorous/laughable reading material.

Perhaps Chiswick should be renamed Cheesewiz, as the analytical substance spewing forth from that community is very similar.  Although, I've never known Cheesewiz to have a tang of desperation...

 

Sun, 06/06/2010 - 23:16 | 398884 Cui Bono
Cui Bono's picture

Is there any explanation for the melt up(?) in futures from about -323 to -88 over the course of today- while the Nikkei has gone off a cliff?    Anyone?  Buehler....... CB

Sun, 06/06/2010 - 23:27 | 398909 Conrad Murray
Conrad Murray's picture

-323 = Friday's close

-88 = Futures action

Mon, 06/07/2010 - 05:25 | 399192 dcb
dcb's picture

speaking to a friend who is an analyst we have both come to the conclusion that the futures market is being manipulated big time. which makes sense. lower volume, futures control more shares.

Sun, 06/06/2010 - 23:42 | 398947 mbasham
mbasham's picture

Job creation is a coincident indicator of economic growth. The unemployment rate is a lagging indicator. Initial umemp. insurance claims is a leading indicator. Are all the people at GS as stupid as this guy?

Sun, 06/06/2010 - 23:43 | 398951 Cui Bono
Cui Bono's picture

oops... I think... Bloomberg showed -312 earlier this morning so I thought it really was the futures.. and not me just being a dope... dooh... CB

Mon, 06/07/2010 - 05:31 | 399195 dcb
dcb's picture

we are in that descending triangle so they have to use the futures to allow if to fir in the chart pattersn to allow the algo's to contol the market. once they start doing things out side of trend lines bad things happen. hence the flash crash. the programs can't handle it.

I'd really love to know more about futures, because all to often they just happen to open exactly in the trned line. like the drop friday. this is the third time I have been within 10 cents on a thirty plus dollar stock at the open. strange how on the inverse shorts it opens on my buy stop and then stocks rise. I also do an amazing job of long buy stops that predict the top to within 5 cents.  somethings just are to strange to be not funny.

 

Mon, 06/07/2010 - 05:42 | 399198 dcb
dcb's picture

I want to add that guy who plunks down a few billion in the last few minutes near the awlful low close must know something. so far it has been very profitable buying the rsi crossover when it touches on the long side. when buying shorts it was the same on the down side. you wanted to always enter the short on the touch.

 

minor factoid to add from bloomberg.

Sinking Confidence

Confidence in stocks is sinking to record lows in the options market even with the U.S. economy poised for its fastest growth in six years. Contracts that pay off should the benchmark index for U.S. stocks plunge more than 23 percent from its April high cost 75 percent more than those speculating on gains, the biggest premium ever, according to data compiled by Bloomberg and OptionMetrics LLC. The 10-day average difference exceeded 50 percent 34 times since 1996. In those cases, the S&P 500 gained a median 7.2 percent in six months.

Mon, 06/07/2010 - 00:33 | 399017 Nolsgrad
Nolsgrad's picture

I'd ponder what are the "real" clients getting if this is what we're seeing.

My guess is a much more muted tone.

 

Euro be screwed big time.  Kinda sounds familiar to the US dollar about 7 months ago though.

Mon, 06/07/2010 - 03:21 | 399124 tim73
tim73's picture

USA is toast. More lawyers graduating yearly than engineers. Good luck with that. Euro descencing will superboost German and other Northern European economies while f*cking up USA big time.

Mon, 06/07/2010 - 05:43 | 399199 mephisto
mephisto's picture

What Erik doesn't seem to get is that you can sensibly be

1) bearish Euro.

2) bearish Eurozone stocks.

3) mildly bullish Eurozone growth. In the short term, until the debt servicing takes over.

 

 

Mon, 06/07/2010 - 07:03 | 399246 theprofromdover
theprofromdover's picture

Chiswick is in West London -on the flightpath to Heathrow.

I wouldn't eat the cherries if I were you Erik, they have been sucking up avaiation fuel for the past 50 years.

Might explain your ramblings though.

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