High volatility on equity markets might very well continue

On global markets:

This week is bound to be eventful, which could be mirrored by the EURUSD. High volatility on equity markets might very well continue. The release of US retail sales will likely be the most important macro indicator released, giving markets an indication of the economy's strength. Probably the most important event, though, will be the EU summit, which should deliver news on the progress and future of Brexit negotiations.

CEE currencies:

Regional currencies did not show a marked change last week w/w vs. the euro. Most currencies managed to appreciate somewhat: the Serbian dinar was the best performer among them, returning to levels of around 118.2 vs. the euro, after some weakening the previous week; this happened without any intervention from the NBS in the last few days. The Polish zloty and the Romanian leu also gained slightly, while the Czech koruna and the Hungarian forint were only slightly changed. We still perceive appreciation potential in the Czech koruna, as the current EURCZK rate (around 25.8) is considerably above that of the CNB's forecast for this quarter (25.3) and our year-end forecast (25.2). As the chance of continued monetary tightening is high in the Czech Republic, we see the koruna firming in the upcoming months. In Romania, the upside surprise in inflation last week could mean that the NBR might restart to keep the exchange rate from depreciating (which would worsen the inflationary picture) rather than hiking at its next meeting in November.

CEE rates and yields:

The most spectacular movement in government bonds took place in Hungary last week, where the 10Y yield went up by more than 20bp. This move was not seen elsewhere in the region, and therefore it would be hard to conclude that the decline in HGBs was solely due to deteriorating international sentiment (courtesy of the large shock on global stock markets). Current yield levels, approaching 4%, are still deemed as too high by us. Some market members also likely think that, judging by the results of the auction for 3Y, 5Y and 10Y papers last week, where the ÁKK increased the offered amounts considerably after seeing very high demand. For the time being, we see the 10Y yield falling back to levels of around 3.4-3.6% in the upcoming 1-2 months, as spreads vs. comparable peers (i.e. POLGBs) went to rather high levels, not fully justified by economic fundamentals, in our view. However, recent developments could be a warning for the MNB that remaining overly dovish might backfire by increasing long-term yields and going against the intentions of the central bank to push debtors towards longer-term, fixed rate credits. In the Czech Republic, short-term rates (i.e. FRAs) are going steadily up, suggesting a non-negligible risk of another rate hike already in November at the next monetary meeting of the CNB. Rate-setter Hampl already commented last week that he would see such a step as quite possible (but remember that he is considered a rather hawkish member of the bank board). In Romania, higher than expected inflation may not immediately translate into expectations of a rate hike in November, as the NBR might prefer to directly influence the currency than hike the policy rate. Governor Isarescu has repeatedly said that the NBR does not want to see the base rate detaching too much from regional peers. Therefore, while we see a small risk of a hike in November, this is not our baseline scenario.

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