Daily analysis 29.06.2016:
It is likely that the negotiations between the European Union and the United Kingdom will be long and difficult. Recession in the British Isles is expected by 70% of economists. According to surveys, French are against leaving the European Union. However, they are not against a referendum. The zloty continues to take advantage of a better sentiment, bot the PLN growths will be rather limited.
Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.
- 14.00: Initial inflation data for Germany (estimations: positive 0.3% y/y and positive 0.2% m/m).
- 14.30: Incomes and expenses of Americans (estimations: positive 0.3% m/m and positive 0.4% m/m, respectively).
- 14.30: PCE inflation from the USA (estimations: positive 0.2% m/m and positive 1.6% y/y).
Positive and negative elements of yesterday's EU summit
Yesterday's comments from the particular European Union representatives, as well as the press conference after the summit (with participation of the Dutch Prime Minister, Mark Rutte; chairman of the European Council, Donald Tusk; and chairman of the European Committee, Jean-Claude Juncker) are giving a rather clear view on the direction of the negotiations between the EU and the United Kingdom.
The European Committe, Belgium and France want the Brexit negotiations to end as soon as possible. On the other hand, the European Council, Holland and the counties of mid-eastern Europe, are presenting a slightly milder attitude. They claim that the United Kingdom should have more time to prepare its standpoint.
However, regardless of internal conflicts within the European Union that regard integration, the standpoint of each state, as well as institution seems to be consistent. If the United Kingdom wants to keep its access to the common market, it will have to respect the four basic EU freedoms. They are – liquidity of products, services, capital and people. Of course, the Brits have decided to leave the EU most of all due to an easy population flow.
The above topic will be the main element of negotiations as well. It is very unlikely that Brussels will make any compromises regarding this matter. On one hand, consistent attitude of the European Union is a positive information for the region. Increasing division would make the uncertainty level within the EU even larger, as it already is.
On the other hand, this information may be negative for the United Kingdom, as well as for the pound. First of all, the future conservative prime minister may have to make compromises that he will not be able to agree for. This will extend the negotiations, as well as increase the division within the Conservative Party even more. Extended period of uncertainty will keep the United Kingdom under pressure. Moreover, it will clearly decrease investments, as well as consumption. We constantly need to remember about the risk of Scotland leaving the United Kingdom as well.
As a result, the negative elements for the United Kingdom will remain visible, even if investors estimate that the risk of the EU breakdown is limited for the time being. This will cause pressure on the pound to continue. Moreover, it will limit the probability of a greater rebound, even if the global markets work-off the majority of their losses.
More than 70% of economists expect recession
Recession in the United Kingdom is expected by 71% of economists who were surveyed by the Bloomberg agency. However, they are not unanimous regarding the question, whether the British economy will start to shrink in 2016, or in 2017. Bloomberg also cited the reports from Goldman Sachs, as well as Bank of America Merril Lynch. According to them, due to Brexit the combined reduction of the GDP will be at the level of 2.5%.
It is also worth noting that the worse the economic perspectives are, the bigger probability that the Bank of England would decide to decrease interest rates. It is possible that purchase of assets from the market will be renewed as well. This will probably continue to wear-off the pound.
Elections and referendum in France
The presidential elections in France will take place in ten months. According to surveys, Marie Le Pen has chances to win the first round. However, she would probably lose in the second round. Le Pen announced that she will organize a referendum regarding the French membership in the EU within six months from her presidential victory. This fact is a significant element of risk.
The Bloomberg agency cited this week's TNS Sofres survey. It showed that 45% of French citizens want to remain within the EU, and 33% want to leave it. The advantage for the EU supporters seems rather large for the time being. However, Brexit limited the faith in the forecast abilities of surveys. Moreover, the French are divided equally on those who are for, as well as against conducting a referendum. Thus, if it actually gets conducted, it can be considered as yet another risk element for the region.
Zloty is steady, but risk remains
The main currencies continued to remain relatively stable against the zloty in the past few hours. It is possible that there will not be any significant chances in the following days as well. The fact that the zloty does not wear-off more than the forint against the main currencies (just as it did before the British referendum) is a positive fact.
On the other hand, external, as well as internal risks for the zloty remain. Standard&Poor's will publish a review of Poland's rating on Friday. In January, the S&P stated that Poland's loan credibility may be decreased. This will happen, if independence of the central bank is endangered, or if the public finances deteriorate more than it was assumed by the agency's base case scenario. These dangers are not happening for the time being. Thus, we rather should not expect a downgrade.
However, it is possible that the S&P will indicate the Brexit related risks for Poland. This may have a negative impact on the rating in the long-term. Thus, even if the following weeks are relatively calm in the global market, as well as if investors wait for the negotiations between the UK and the EU to begin, the space for consolidation of the zloty will remain limited. On the other hand, if there is evidence for a slowdown in the Polish, as well as the European economy, pressure on the zloty may quickly return, even before the formal negotiations begin.
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