FX Strat & Technical Analysis + Italy, MIB Update – HSBC,CS,SC,CB …
For the first time in quite some time we got yet more dovish words from the ECB and hawkish, no action again. Yet, this time, rather than the euro rallying the lack of action did not price support the euro. This is interesting and possibly meaningful price action.
“QE was discussed” was about as dovish as the language got as inflation sunk to 0.5% for the euro zone on the latest reading. Several countries including Spain have deflation at present in absolute nominal yearly terms. No longer month to month. Clearly deflation is worsening not improving. From a top down macro approach can anyone be surprised. The European banks are contracting credit to the private sector. Public deficits continue but are contracting in relative terms and in many cases nominal terms. Whats more the ECB is contracting her balance sheet whilst all other “DM” central banks either expand or hold, at elevated levels, their balance sheets. The ECB is the odd one out against a back drop of the weakest growth. Neo Keynesians would expect to see the reverse.
Technically speaking we have fading momentum in the euro vs the usd. Professional participants are positioned even on the pair which is bearish, from a contrarian perspective, given the technical weakness. Ie she has room to run here. Overall positions from large and small speculators were long euro so this again, from a contrarian perspective is bearish euro. Macro top down its easy to see why participants are overall long the euro given the tight monetary stance of the ECB but given the momentum divergence and failure to breakout she is short term susceptible and targeting the 1.36 level in the short term. Any news flow bearish the euro will create a large move. The Citi, Fitzpatrick comments re the narrowing of the spread in the 10yr bond curve between member states is also very critical. It has no room to run anymore and historically this normally leads to euro weakness as the spread between the real economy is significant and not narrow at all!
For my own book I have been positioning for euro weakness and hold short euro positions and no euro denominated long equity positions at present. (Euro gold looks a good buy to me).
Anyway i’ll cut to the reports:
Here by way of useful macro back ground a report issued just now from Yardeni on the latest central bank balance sheets:
We can clearly see the tight monetary stance of the ECB vs her peers. It is a tight stance in a tight banking regulatory framework within a banking system with low reserves and toxic paper still on balance sheets. No wonder that euro private credit is the loser in this environment. All banking capital is employed lending to the public sector which continues to expand as a % to GDP. The French public sector is now 57% of GDP. I wonder at what point we call a country a centrally planned democratic economy? France must be there or very close now. The trend across Europe, Germany aside, is not positive. Germany is the pillar of strength. Her share of Euro GDP expands relatively year on year as it has done for the last 5 years.
Here CS on the overnight macro strat report :
Here the CS team’s daily FX strat from today:
Here Scotia overnight on the fx related news flow:
Here HSBC with their regular weekly take on the FX pairs and markets:
And here SC with their weekly take on the fx pairs from last week:
And here CommerzB with their macro fx strat views released today:
And more tactically now..
Here Citi today:
And here is Nomura with some charts and levels on two key pairs:
Eurusd
And here the USDJPY (key level of 104 combining nicely with possible equity weakness around the 15000 level nikkei225).
Equity market wise although the sp500 has achieved a margin higher higher again, market breadth has not confirmed, great divergence to momentum and the russel and the nasdaq non confirm and show weakness. Euro Autos aside the euro sectors don’t confirm either. Its a tricky trading environment this here post the mid feb levels.
The Italian equity index has been on fire recently to the upside with a+15% move in the last 3 months.
In the last year from mid April 2013 she is up +42%.
From mid April 2012 to mid April 2013 she was up +22%
If you have been long Italian stocks in the last 2 years or so congratulations as you have out performed most world equity markets.
Here BNP Focus Italy with their latest report:
If you are still long its worth noting that the spread to 200 dma is the largest its been in a bull trend since 2006 and in addition the historic correlation to the ibex 35 is very constant over long periods of time.
The spread has decompressed at present. Will the ibex play catch up to the upside and out perform the MIB or will the Mib now move to the mean again in the coming months and possibly decline in nominal terms? I suspect the later, unless the ECB acts meaningfully, which i now doubt! Overall, for holders of Italian equities, top down and bottom up id be very cautious looking for an extension to the upside here. Part of the recent moves have been abouit short covering more than active long investment into the Italian market. Here Markit on the subject:
And here the spread of Italian to German 10 yr bonds.
Very limited upside and plenty of downside risk here. As Citi Bank’s Chief Analyst, Fitzpatrick commented a week ago in his report released here, we have seen this before!
Anyway I leave it there. Have a great weekend team. Many reports over the weekend as usual.
All the best
Rich
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