Review

  • Fully in line with consensus and our expectations, the Hungarian central bank (MNB) today cut its key policy rate by another 50bp to 7.50%. Looking ahead, we still envisage one more cut, but we also think that the markets are too aggressively priced for further monetary easing, see our comment here.

  • In a fresh report, Standard & Poor's says that Russia's structurally weak banking sector faces increasing systemic risk. The report suggests Russian banks are likely to continue to suffer as a result of the economic downturn. S&P estimates that cumulative gross problematic assets could increase to almost 40% of total loans over the full course of the downturn. Hence, with banking balance sheets under strain it looks unlikely that the banking sector can expand lending in the coming quarters.

  • Lithuanian August retail trade declined 23.1% y/y from -27.1% y/y in July. The outcome was only marginally worse than our expectation of -22.5% y/y. As expected, this moderate improvement was mostly due to base effects as monthly data indicated a decline of 0.3% m/m. 


Preview

  • Today the Romanian central bank (NBR) is expected to cut its key policy rate by another 50bp to 8.00%. This is fully justified given the continued subdued inflationary pressures and the collapse in domestic demand in Romania. That said, the recent weakness in the leu and signs that global risk appetite might be easing a bit limits the potential for further monetary easing in the coming months.

  • Look out for Czech Industrial Production for August today. Czech industry is still struggling, but the beginning of the recovery in the global economy should gradually help its industrial production to recover in the coming months.


Trading update

  • Risk aversion seems to be inching upwards globally as there have been some signs that the global recovery might be losing momentum. Furthermore, the continued strengthening of the Japanese yen is making carry trades less attractive. This is beginning to weigh on the EMEA currencies which all faced some headwinds in Monday’s trade. Looking ahead we would specially look for direction from global financial conditions – is the global recovery losing momentum or is the recovery still underway and how fast will quantitative easing of global monetary policy be scaled back? Keep an eye on the higher yielding currencies. After last week’s rate decision from the South African Reserve Bank (SARB), South African yields have started to tick up. This could spread to other EMEA other markets sooner rather than later. We are especially looking for Hungarian yields to rise going forward.