CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

RO Bonds: The MinFin sold bonds maturing in June 2019 worth RON 500 mn as planned, at an average yield of 4.59%. Demand was quite weak with total bids at RON 598 mn. Local market sentiment was dominated by investors’ worries about the situation in neighbouring Ukraine and the Romanian leu traded close to 4.47, its weakest level in one week. In our view, upside risks to local currency government bond yields persist, stemming mainly from higher inflation in the coming months and Fed tapering. Our year-end forecast for 5Y bond yields is unchanged at 4.8%.

PL Macro: In our view, the inflation rate should come in at 0.6% y/y in March (slightly below market expectations), fitting with the picture of below consensus surprises across the region. The impact of the release, however, should be market neutral, as there is little reason for speculation that the MPC will change its current bias. For markets, the inflation rate in the Eurozone may be more important, as it may have a more immediate influence on future ECB actions. Because of this divergence in monetary policy, we see potential for the zloty to appreciate toward 4.09 at the end of 3Q14.

HU Macro: According to the latest central bank balance sheet, the Hungarian government's liquid reserves jumped in March to HUF 1,784 bn (EUR 5.8 bn, or roughly 6% of GDP), thanks mainly to the USD 3 bn Eurobond issue in March. The level of reserves are now at the highest since Spring last year. Hungary has two remaining Eurobond redemptions (EUR 600 mn in May and EUR 1 bn in July) and a major EU FX loan repayment (EUR 2 bn in 4Q) this year. Two-thirds of the total FX needs are already prefinanced. We maintain our current exchange rate forecasts (EUR/HUF at 305 full year average, 302 at the end of the year) and see the 10Y bond yield at 6.00% by year-end.

Traders’ Comments:

CEE Fixed Income: Ukraine‘s central bank raised the benchmark discount rate from 6.5% to 9.5% and the overnight loan rate from 7.5% to 14.5% last night in an effort to reign in a rapidly depreciating UAH amid rising tensions in the eastern region of the country. The danger of armed conflict in Ukraine may have been one reason why the HUF weakened in spite of confirmation that Industrial Production rose more than 8% in February but HGBs had an unspectacular day and we are left with the impression that Ukraine is not necessarily at the forefront of investors minds currently. CEE fixed income and FX markets had been on the back-foot a bit during the European trading session whilst equities on major stock exchanges traded lower as we enter into the reporting season and await tomorrows Chinese GDP numbers but US stocks got a boost from above consensus retail sales numbers and by the look of equity index futures prior to today’s open, it looks as if European equity markets will hold steady. The prospect of QE in the Eurozone is a more dominant theme at the moment as Mario Draghi goes to great lengths to jawbone the EUR down, which, at some point, will have to be followed up with decisive measures or run the risk of lost credibility.