Wednesday, July 24, 2013
Back to Europe
Growth - European PMI data this morning was good across the board and Italian retail sales outperformed too. It looks as though the crashing fighter pilot of European growth has started to pull up and is skimming the treetops having managed to avoid disaster. Which is nice for us.
Unity - Germany's data was strong but it is worth considering the disparative impact a China slowdown would have on Europe. Germany, the great supplier of capital goods and modern machine tools is most likely to feel the cool breeze ahead of other Euro nations (barring Italian high end fashion). Which leads TMM to see another benefit to Europe overall. Recent German data has already pointed to an increase in intra-European trade and a further decline in external Asian demand will continue to flatten out the economic differences between Germany and the peripherals that in the past have resulted in the stresses within policy unity. So basically, Germany getting "Edward the Seconded" (see glossary) by China/Asia demand is good news for European policy unity and should encourage relative longs of Peripheral equities over German stalwarts.
Positioning - OK, hands up if you are long Eur/usd. You are? Well we think you are pretty lonely out there. Despite a drop in Usd longs against a pick up of Euro longs in some reports we see, the trend we detect is that most still want to be long Usd (well they are raising rates aren't they? And look at their growth!) and short Europe (they have to cut rates next or at least stay on hold for eternity don't they?). The rallies in the likes of Eur/Usd (and Aud/Usd for that matter) have so far been met with "sell the rally, great opportunity to buy more USDs". Which reinforces TMM's belief that few have the upside trade on. We noted a couple of posts back that historically US rate rise environments of the past in have actually seen USD fall in the following months, now whilst the circumstances are indeed different this time, that fact is another barb in the complacent "long usd" meme.
Meanwhile in the US, it's nearly August so that must mean we are approaching Debt Ceiling silly season again and it looks as though the Republicans are lining up a "Monty Python Black Knight" scene with their proposed budget cuts. It may well be noise but it is another road bump in the path of dollar strength.
So TMM are beginning to think that if European policy makers can maintain the summer STFU policy so well used in 2010, Eur/Usd could be set for one of those up moves that "shouldn't have happened"
However there is one other place that TMM fancy being long Euro - Against gold. The retracement in gold higher has seen the monstrous short positioning level out and as we still don't see a compelling macro story for it, we are looking to reshort. Hearing scare stories of physical demand emptying vaults (Hero Zedge having gone into desperate, even for them, overdrive recently) fits a nice psychological profile that upside is now expected/discounted. India increasing restrictions on imports on Monday is just another weight on its progress.
We hereby brace ourselves for the gold trolls in the comments section. Tin Hats.