Recap 2014-07-10


Brent Donnelly at Citi notes that the weakness in EUR denominated assets could be a EURUSD negative. I thought that was a good point so I did a bit more digging. Below is a chart of the EU Financials CDX vs EURUSD, which has been fairly well correlated the past couple years. Note also the recent divergence between the series.

My point is that perhaps the EUR has already priced in such a view. To some extent, that hypothesis is supported by the CFTC data, which shows EUR shorts at the highest level since late May 2013, which also marked a low in the cross. Note the divergence between the two series then as well.

I am in no way saying we should be making trading decisions based only off of two charts with floating axes – but I do think that it may still be a bit early for the bearish EUR trade, especially since consensus may be coming around on the view that AQR may be bullish for growth. And articles like the one in the FT on Tuesday that fund managers are devoting a “wall of money” to buy up EU bank assets suggests that portfolio / FDI inflows are likely to continue.

Note that Australian Unemployment, after, a temporary drop, is now again near an 11 year high. While a stabilizing participation rate may have had an impact, the larger picture suggests that is only a small part of the explanation:

It certainly doesn’t mean that the Australian economy is falling off a cliff by any means. But given that the Unemployment rate of almost every other DM country is currently falling, the high-ish prints in a pro-cyclical economy like Australia is likely a cause for concern.

Interesting bit via FTA:

an empirical analysis of aggregated survey data of professional forecasters from Consensus Economics for 25 economies between 1990 and 2013 indicates that … there is indeed a tendency to underestimate GDP growth for the first year of a recovery, but that there does not seem to be any bias for the second year (see the table). This finding holds for forecasts both for the current year and the next year, with the bias being somewhat more pronounced for forecasts for the following year. These results suggest that there is potentially a risk that the projections of professional forecasters of GDP growth for 2014 will be too low, given that 2014 should be the first year with positive real GDP growth following the 2012-13 recession.

Finally, this is a good post on cost cutting & R&D:


  • Portugal’s Espirito Santo International (parent company of the 2nd largest Portuguese bank) is delaying payment to debt holders. They’re the largest shareholder of Banco Espirito Santo’s through subsidies.- WSJ Espirito Santo is halted. BES is down 18%. This news has been closely watched within the HY community in europe, so while equity negative this morning, the story has been considered a "known issue." Diario Economico is running a story this morning that ESI is considering the possibility of seeking creditor protection via bankruptcy if it doesn’t manage to get its restructuring plans approved at the July 29th AGM. The senior debt traded in the low 90’s, Senior CDS around 450bps, up 60bps on the day. Barc:"With Portugal under a 3yr troika programme until 2 months ago, investors are wondering why this was not detected & dealt with earlier" h/t @katie_martin_fx Citi: Our equity analysts last week estimated that the maximum losses for the bank stemming from its exposure to the rest of the group could amount to €4.3bn… even in the extreme case where the troubled bank is not able to raise the potential capital shortfall from private sources, we note that the cash reserves still available with the Portuguese government for bank recaps, as part of the bailout programme, amount to €6.4bn (or 4.2% of GDP). Total cash reserves of the central government (including the €6.4bn) amounted to an even larger €15bn (or 9% of GDP) at the end of 2013, as the government has been building buffers to smooth the transition from official bailout funding to market funding.
  • US Jobless Claims declined to 304K vs 315K exp and prev.
  • AU Employment increased 15.9k vs 12k exp, driven by part time employment. Unemployment increased to 6.0% vs 5.9% exp and 5.8% prev, driven by the participation rate, which increased to 64.7 from 64.6.
  • NZ Mfg Survey increased to 53.3 vs 52.7 prev
  • France CPI declined to 0.5% vs 0.7% exp and prev
  • Private-sector core machinery orders in Japan (excluding orders for ships and from electric power companies), a leading indicator of capex, fell steeply by 19.5% mom in May, following a limited pullback in April in the wake of the consumption tax hike. On a value basis, orders fell back close to their most recent bottom in January 2013. Even with monthly volatility, machinery orders had managed to stage a modest recovery since early 2013 through April, but with the sharp decrease in May, the Cabinet Office lowered its assessment of orders, highlighting signs that the uptrend is at a standstill.
  • China’s trade balance $31.5bn versus $37bn expected. Exports +7% y/y vs. +10% expected.
  • Offerings of stock and stock-linked securities have raised $510.1 billion in 2014 through Tuesday, according to data provider Dealogic. That beats out the previous record for that time period, $498.9 billion in 2007. – WSJ


  • Fri: Canada Employment, USDA WASDE Reports,
  • Mon: RBA Minutes
  • Tue: BoJ, UK CPI, German Zew, US Retail Sales, Empire Mfg, Import Prices, CA Existing Home Sales, China Retail Sales
  • Wed: UK Employment
  • Thu: