Market uncertainty spikes due to tariffs

On the radar

• Fitch kept Slovenia's credit rating unchanged at 'A'. However, the outlook was revised from stable to positive.

• Retail sales in Romania landed at 3.3% y/y in February.

• In Hungary, retails sales growth was at 3.3% y/y in February

• In Czechia, industrial output in February grew by 1.7% y/y.

• At noon CET, in Serbia producer prices will be released for March.

• Romanian central bank will announce interest rate decision and we expect no change in the key interest rate.

• President Trump’s announcement makes us revise our forecasts for CEE that we plan to publish by mid of the week.

Economic developments

President Trump's announcement regarding global tariffs hit markets hard. The stock market in the US plunged, with the S&P 500 Index losing roughly 10% since April 2 (the day of the announcement). US treasuries moved visibly down. However, President Donald Trump and his economic team dismissed investors' fears of inflation and recession. Furthermore, the supposed condition of eliminating the trade deficit of the country with the US in order to have the tariffs lowered may prove to be hard to achieve. The uncertainty level is very high. Today, we look at the VIX Index, which skyrocketed on Friday, reaching as high as 45.3. Such development is comparable to two other major economic shocks, the Great Financial Crisis in 2008 and 2009, and the pandemic, already suggesting market panic.

Market developments

Fitch kept Slovenia's credit rating unchanged at 'A.' However, the outlook was revised from stable to positive. The most recent fiscal outperformance (2024 budget deficit reported at 0.9% of GDP) was underlined as a key factor behind such action. This decision aligns with our view of Slovenia being a good candidate for a rating upgrade. CEE currencies have been hit hard by President Trump's announcement on global tariffs. The Czech koruna and Hungarian forint weakened roughly 1% against the euro throughout the week, while the EURPLN moved to 4.25 (2% depreciation vs. the euro), the highest since mid-January. Government bonds, including those in CEE, benefited from the sell-off on global equity markets. While 10-year yields in Czechia and Hungary declined slightly more than in Germany (-30bp vs. -20bp w/w), Polish 10-year bonds rallied twice as much (almost -60bp w/w). The more pronounced market reaction in Poland may also be related to Governor Glapinski's change of heart and announcement of upcoming interest rate cuts. Not only may they come earlier than expected, but the size (100 basis points) may also be bigger.

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