Daily analysis 14.06.2016:
The scenario of the United Kingdom leaving the European Union is becoming more realistic. The majority of surveys show advantage for the Brexit supporters. Global consequences of fear of the British referendum results. The zloty is the weakest of thirty-one currencies from developed, as well as emerging markets.
Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.
- 14.30: Retail sale from the USA (estimations: positive 0.3% m/m; excluding fuel and cars: positive 0.4% m/m).
Surveys indicate Brexit
Despite the nearing Federal Reserve meeting, as well as new data from the USA, investors are basically only focusing on surveys in the United Kingdom. They are trying to analyze their impact on the pound, the global treasury bonds market and quotations of the emerging markets currencies.
Since yesterday, we received four new surveys. The ICM published a phone survey, as well as an online survey. Both of them show 5% advantage for the Brexit supporters. Moreover, the Brexit supporters increased their advantage to 7% in the YouGov online survey.
On the other hand, phone survey conducted by the ORB may seem optimistic for the EU supporters. It shows that 49% supports the status quo, and 44% votes for Brexit. However, if we consider only those who are certain that they will vote, the Brexit supporters gain 1% advantage.
We should focus on the trends. Previously, online surveys showed an approximately balanced result. On the other hand, phone surveys suggested a 10% advantage for the EU supporters. Currently, online surveys indicate a clear advantage for the EU supporters, and phone surveys began to approach the balance between the Brexit supporters and opponents.
The British referendum is generating the greatest changes in the debt market. Profitability of bonds from the euro zone's core countries, such as Germany, Holland or France, are decreasing. On the other hand, there is an increase in profitability of Spanish, as well as Portuguese bonds. This is one of the basic parameters that shows an increase in system risk for the weaker states.
We can observe the capital flow to the yen, as well as the franc in the currency market. Quotations of the dollar are looking relatively good as well. On the other hand, the pound, as well as the emerging countries currencies, are losing the most. Since a clear increase in the risk of Brexit (five days ago), the zloty lost more than 3% against the dollar, and 4.5% against the yen. The Polish currency is the weakest among currencies from developed, as well as emerging markets.
The behavior of the American debt instruments is also showing a worse global business cycle, lower inflation, and the capital flow to the safe coasts. Profitability of two-year treasury bonds decreased to 0.67% before noon. This is their lowest value since February 2016. At that time, the market feared the condition of China. On the other hand, ten-year treasury bonds are going below 1.58%. This is the area quoted at the end of 2012.
A decrease in profitability of the German ten-year debt below 0% is one of today's main events as well. This gives little hope that the euro zone's economic growth, as well as inflation will accelerate. At the same time, this goes to show that liquidity and safety are much more important than any profit.
Of course, tomorrow some of the market's attention may be focused on the Federal Reserve meeting. However, the FOMC will probably not want to intensify the situation by suggesting any moves. Especially considering that the terminal contracts for interest rates suggest the hikes no sooner than before February 2017. Of course, quotations of bonds, as well as interest rates instruments may vary. However, in the current situation the Fed will rather not want to suggest that the hikes may occur much sooner.
Extreme sensitivity of the zloty
For the past few days we took note that the zloty is very sensitive to the coming surveys regarding Brexit. On one hand, nervousness on the Polish currency has fundamental reasons. On the other hand, it is probably a result of a general aversion towards the PLN from the foreign capital. Today, the franc and euro were near the area of 4.10 and 4.45, respectively. The dollar went above 3.95 PLN.
The fundamental matters are a result of the risk of a smaller stream of the EU funds to Poland in case of Brexit, for example. The foreign trade is a significant element as well. According to the Polish Central Statistical Office (GUS), in 2015 Poland exported the goods worth more than 50 billion PLN to the United Kingdom. This country is Poland's second export partner, right after Germany. On the other hand, import is relatively small and it is worth less than 20 billion. In case of Brexit, the 30 billion PLN surplus would be in danger. This would have a negative impact on the Polish national currency, as well as profits of particular enterprises.
The risk of further downgrade of rating is an important element as well. If the United Kingdom leaves the European Union, the economic condition of the entire euro zone would be under a serious threat. This is because of a general nervousness in the financial market. It would translate to a withhold of investment decisions of entrepreneurs, as well as consumers. This could cause that a tight budget plan for 2017, could become an argument for a further downgrade of Poland's loan credibility.
A negative sentiment to the zloty, as well as the Polish treasury bonds, will probably remain until the referendum planned for June 23rd. If it ends with the status quo, we can expect an improvement in situation of the zloty. Until then, the British surveys will remain in the center of attention, as well as create behavior of the PLN.
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