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New Europe Weekly

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Risk sentiment strong, but Latvian worries weigh on CEE

Fri, Oct 16 2009, 17:52 GMT
by Lars Christensen

Danske Bank A/S

Key events next week

Otherwise next week’s calendar is fairly thin. However, we could be in for another week of market jitters if the Latvian situation develops further. The Latvian government is due with its 2010 budget on October 28, and we could be in for some turmoil ahead of this date..

Fixed income outlook

Overall market rates trended lower this week on fairly benign risk sentiment. This is indeed notable in Russian markets, where market rates have been driven sharply lower recently due to an improving external flow balance as oil prices reach a one-year high and a more benign inflation outlook.

During Friday however Turkish rates were pushed up after the Constitutional Court ruled in favour of a case filed by the opposition CHP, which said that foreign investors and locals should be treated equally on the application of the withholding tax on bonds and shares. Since locals pay 10% in withholding tax and international investors pay 0%, the speculation is that foreigners will have to pay 10% if the proposal is approved. We expect that the government will try to prevent imposing such a tax on foreigners since that will create negative spill-over to foreigners appetite for Turkish markets. However, it is not certain that the government indeed can prevent it.

FX outlook

As the overall risk sentiment is still benign and EUR/USD trends up, we should CEE currencies top perform quite well. However, due to spill-over from Latvia especially the Polish zloty has been rather volatile this week. We expect long-term potential for EUR/PLN to move down toward 4, but the timing is a little off, due to contagion from Latvia.

We updated our EMEA FX forecasts this week. A notable change to our forecasts is that we expect a fairly stable Russian rouble in the coming months, due a high oil prices, improving external balances and a more benign inflation outlook.

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Published on  Fri, Oct 16 2009, 18:06 GMT