CEE Macroeconomic and Fixed Income Research

Chart of the Day:

DAX & PLN: When the DAX loses value, the PLN suffers.

Analysts’ Views:

RO Bonds: The MinFin sold bonds maturing in Aug-16 worth RON 400mn at 2.32%. Demand was strong and investors put in bids totalling RON 1.6bn. In the meantime, the inflation rate surprised to the downside in June and came in at 0.7% y/y, below our forecast and market expectations (both at 0.9%).
Growth of consumer prices was negative on a m/m basis (-0.3%), underpinned by cheaper food and services. Chances for additional monetary easing by the NBR increased and we could see another reduction of FX MRR in August and a rate cutting cycle in the autumn. On the other hand, the bond market remains driven by political risks and a possible friendly break-up between the government and the IMF in the next few months. This makes us believe that the current rally on the bond market is unsustainable and a trend reversal of bond yields is likely. We keep our forecast at 4.30% for the 5Y yields for the end of this year.

SR rates: Following its more aggressive stance at previous meetings, the NBS has now decided to take a pause, leaving the key policy rate unchanged at 8.50%. Although inflation is still below the target interval of 4+/-1.5% and the forecasts indicate the continuation of such a trajectory, the NBS took a more cautious approach, amid rising fiscal uncertainties and deteriorating economic conditions. We believe that the NBS will stay on a similar track at least until September, when we should see a budget revision proposal, an official assessment of the flood damage and the continuation of IMF talks. Looking forward, we see some space for additional cuts by the YE, depending primarily on the progress in the implementation of fiscal consolidation and structural reform measures. Our current key rate forecast for the end of the year stands at 8.00%.

Traders’ Comments:

CEE Fixed Income: The largest bank in our region, UniCredit, saw its 8% USD AT1 post the biggest intraday price drop since issue as Banco Popular delayed its euro benchmark AT1 sale, citing heightened volatility in the secondary market. Financials are taking the brunt of the risk-off investor sentiment as investors watch Portugal for signs of contagion after Espirito Santo Financial suspended its shares and listed bonds. Banco Espirito Santo said it has exposure of EUR 1.18 bn to companies of Grupo Espirito Santo and is waiting for the release of that group’s restructuring plan to assess any potential losses. Portugal’s central bank said the nation’s second-largest lender is protected after its parent missed debt payments but rating agencies and investors remain unconvinced. The spread between Portugese and German benchmark bonds rose by as much as 50 bps in yesterdays trading session. The contagion spread beyond peripheral fixed income to the DAX and, by extension, to the PLN which correlates strongly with German equities.