Keep Your Eyes Off The European Cash-Flow Ball
The biggest headlines (and refutations) have been saved for the struggling nations of Europe's periphery. Top-down, this makes sense as PPP-weighted PMIs show Europe notably decoupling (badly) from the rest of the world - with periphery and eurozone-ex-periphery having resynced at these lower levels. This convergence (down) of the core with the periphery is not good news but what is more concerning is that while many investors have assumed the 'pricing' of risk assets in the periphery relative to the core is due mostly to 'contagion', there is in fact a massive fundamental divide between the core and periphery's corporate debt credit quality. With ECB's OMT apparently removing much of the systemic risk premium (though we are clear on our views of this short-term LTRO-esque reaction), the idiosyncratic risk differential between Core and Periphery credit quality is large and getting larger. It seems the need for simultaneous private and public deleveraging in the periphery - especially in Spain - is as critical as ever.
PMI Surveys continue to signal Europe's divergence from the rest of the world (though we suspect it is a timing issue - not a decoupling) - especially as core has now caught down to periphery...
Credit quality in Europe exhibits a pronounced difference (and increasing divergence) between the core and the periphery (the chart shows the media de-seasonalized debt-to-EBITDA ratio in the Euro area)
Charts: Goldman Sachs