- Beyond short-term hopes for the ECB, euro bull case weaker in the long-term
- Future growth, politics and elevated sentiment all working against the currency
- Bridgewater's big bet against Italian firms makes sense for a longer-term investor
We have previously written that being a euro bull is just too enticing, despite the gloomy outlook for the common currency in the longer term. Even the latest political tensions in Catalonia has done little to lower speculator appetite for the euro, which remain at historically elevated levels based on US futures positioning data. Beyond the ECB, which is widely expected to announce that it will taper its quantitative easing program at its upcoming meeting later this month, there are few obvious catalysts for the euro in the long term.
Politics, growth and sentiment all point down
Looking at politics, the weak performance of the CDU/CSU in Germany means that Merkel will have to share power with the Free Democrats (FDP). Given the FDP’s fiscally conservative voter base, the party is strongly opposed to Macron’s suggestions regarding a European Monetary Fund or a common deposit insurance scheme for banks in the Eurozone. According to a recent Reuters report, the FDP have also insisted on the CDU giving up control of the finance ministry. As Germany turns inwards, the EU’s largest economy is less likely to provide financial help to the Eurozone in the event of a crisis.
While the Eurozone has enjoyed a backdrop of strong economic growth in the recent past, much of this growth was artificially propelled by the ECB’s aggressive monetary policies. As the ECB looks set to taper the pace of its quantitative easing program, the re-emergence of the economic cycle will likely result in slower growth going forward. An overview of recent Eurozone GDP growth is shown below for reference.
Growth on an accelerating trend for 24 quarters, where’s the cycle?
Lastly, we have warned that the current consensus long position in the euro looks dangerous, given its size when looking at recent history. Speculators in the euro remain true believers that the ECB is set to taper (which is increasingly likely given various indications from the Bank), but there is a risk that the currency weakens shortly following or before the announcement. The pattern of ‘buy the rumor, sell the news’ is the real risk of being long euros today.
The world’s biggest hedge fund places a big bet against Italy
For more long-term oriented investors, shorting the Eurozone has become much more interesting than going long the currency. This is particularly the case for weaker members such as Italy, who continue to suffer from low growth and high debt, despite the strong performance of the region overall.
Bloomberg recently reported that Bridgewater has recently added to its bets against Italy, which now exceeds $1.4b in total. The hedge fund, which is the world’s largest, is short several Italian companies including Enel (Italy’s largest utility), Eni (a large Italian energy firm), UniCredit (Italy’s largest bank by assets), Intesa Sanpaolo (Italy’s second largest bank by assets) and Assicurazioni Generali (the largest Italian insurer). In short, Bridgewater is short the largest and most successful Italian firms that are reliant on the success of the local economy.
With Germany hesitating to foot the Eurozone’s debt bill and growth more likely to slow in the future, Bridgewater’s bets make sense given the context. While short-term speculators continue to hold out for the ECB, the longer-term picture is far murkier. Only time will tell if Bridgewater's investment thesis is correct, but its outsized bets against Italy are worth noting for euro bulls.