CEE Macroeconomic and Fixed Income Research

Analysts’ view:

TR Politics: Current PM and President Elect Recep Tayyip Erdogan announced current Foreign Minister Ahmet Davutoglu as the Justice and Development Party’s (AKP) new leader and the new PM to replace Erdogan once he leaves for the presidency. This is no surprise since media sources and even current President Abdullah Gul have already predicted that outcome in advance. It is widely expected that Erdogan will de-facto continue to govern the country and the change in his role should not have any major impact on the government’s strategies. The crucial parameter for the market is the cabinet reshuffling and in particular whether the Deputy PM in Charge of the Economy Ali Babacan and Finance Minister Simsek will remain among the key policy makers. There could be some market volatility until then. We maintain our 2.21 USD/TRY forecast and 9% two-year bond yield forecast for the year-end.

RO Bonds: Debt managers sold bonds maturing in Aug-16 worth RON 300mn as planned, at an average yield of 2.61%. Demand was strong and bids totaled RON 807mn. We continue to expect higher yields by year-end (+70bp from current levels for 5Y bonds), due to fiscal and political risks related to the November presidential election and a possible break-up with the IMF. With 2/3 of this year’s gross funding needs covered through bond issuance on local and external markets so far, debt managers are not in a position to reduce bond issuance sharply in the remainder of 2014. A liquidity buffer of four months of gross funding needs offers some relief in case of an abrupt deterioration of financial markets conditions, but does not safeguard against a gradual yield increase under normal market conditions.

Traders’ comments:

An uneventful day yesterday, with macro-economic data hitting the screens within expectations in the US and slightly weaker manufacturing data from Europe, especially in France. Still, a market moving event turned out a statement twitted by RIA Novositi, a Russian news agency stating that “Russia has no plans of military incursion into Ukraine – Defense Ministry”, equity markets in US hit all-time high. Nevertheless, German yields remained at their lowest levels with the 10Y yield continuing to trade below 1%. The focus today will shift towards Jackson Hole. Fed Chairwoman, Janet Yellen will give her latest views on the development in labour markets.