Foreign Politics: CEE bonds did not follow the increase of German Bund yields

Week ahead

Politics will remain in focus this week. One would think that domestic factors would reign, but the weekend elections (parliamentary in Poland, municipal in Hungary) have not brought any material change and last week's collapse of the Romanian government was the fourth one since the last elections in 2016. So, all eyes will be on the international political scene, particularly the European Council meeting scheduled for the end of this week, at which Brexit will be discussed. Any progress towards an agreement would be supportive for CEE countries and markets, as negative sentiment has already been taking its toll on confidence in industry and output. Romania will report its industrial production numbers for August on Monday and Poland will release its September numbers on Friday. In Romania, we expected a slight decline of production, while Poland should show growth (5.3% y/y), due to a positive calendar effect. On Friday, a rating upgrade of Croatia by Moody's is expected.

FX market developments

The Polish zloty and Hungarian forint were the only CEE currencies to benefit from the stronger EUR and increased risk appetite, having appreciated last week. There have been new hopes raised about the feasibility of an orderly Brexit after the meeting of the Irish PM with Boris Johnson. Moreover, the first round of talks between China and the US went well. Other currencies were more affected by domestic factors. Weak Czech industrial production data for August and a drop in inflation took a toll on the Czech koruna, which depreciated, hitting 25.900 EURCZK on Thursday. After a successful no-confidence motion against PM Dancila, the Romanian leu jumped above 4.76 EURRON.

Bond market developments

We saw some yield spread compression in 10Y CEE bonds over German Bunds last week. Many CEE bonds did not follow the increase of German Bund yields (+15bp w/w), which seemed to be associated with an easing of the risk-off mode, as 10Y US Treasury yields went up as well (+19bp w/w). Serbia sold EUR 30.3mn of 10Y EUR-denominated bonds at an average yield of 1.89%. Croatia's bonds continued in their own rally, ahead of another potential rating upgrade by Moody's already this Friday. In Romania, the Ministry of Finance rejected all bids in an auction of 12Y government bonds, due to low demand.

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