Europe Update – euro + pound jump this week-Agricole and SocGen both fell ~8% $EWG

 

Europe Update – euro + pound jump this week

• · Europe – bigger picture update - Despite all the noise around EU sovereign problems, the pound and euro are currently at multi-week highs (the euro climbed ~1.5% this week and broke above its 50day MA and is up >5% from its 6/7 low). 
• Several countries throughout Europe have outlined substantial austerity measures in recent weeks (inc. Greece, Germany, Spain, and the UK), helping allay budget worries.  There have been a ton of debt sales, inc. from some of the most at-risk EU sovereigns (like Spain on Thurs), that have been absorbed by the market (the Spain sale on Thurs came after Moody’s on Wed came out and put the country on watch for a potential downgrade). 
• The economic data points out of Europe haven’t been missing consensus expectations (see the European PMIs out Thurs) to the same extent as ones from the US and elsewhere (although this is in part b/c expectations for Europe were never all that high).  Inflation readings for Europe remain subdued (although this isn’t necessarily the case in the UK). 
• The Bottom Line: budget cuts + hawkish/tightening CBs + improved funding conditions + inline eco #s = stronger euro and pound. 
• As both currencies continue their climbs, there has been a reversal of some carry trades occurring (this has been the case Thurs especially) – the euro had become a funding currency for some (not so much the pound) but it is now being bought back as those trades are unwound (this also explains why the yen has been so strong of late).   The weakness in gold is related to this – gold dropped ~3.6% this week and broke under its 200day MA. 
• · Europe trading trends – the weakness was pretty broad this week – there weren’t any great trends.  Financials led on the downside, w/French banks some of the worst performing stocks, as Agricole and SocGen both fell ~8%, although BNP outperformed (it fell only 2.5%).  Other financials also were hit (Unicredit, AXA, ING, DB all dipped 4%+).  I
• ndustrial stocks were heavy as well, w/Arcelor down 8.5% and BASF falling 5%.  Sanofi slumped 4% (the stock fell more than 2% Friday alone following a Bloomberg article talking about the company pursuing a large US deal worth $20B+).  In London, financials also underperformed.  MAN Group dropped 12% (closing in on the low-end of a recent trading range) ahead of a trading update this Thurs morning. 
• RBS fell ~10% and underperformed (interestingly, Lloyds Banking Group climbed ~1% on the week). 
• BP jumped 5.7% in London, its first weekly advance since the week ended 4/16 (see larger update below on BP). 
• The London mining stocks, despite seeing a lift on Fri following the Australian mining tax adjustment, still slumped this week (Xstrata -9%, Rio Tinto -8%, BHP -7.7%).