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Afternoon analysis 02.02.2015

2 Feb 2015 17:21|Artur Wiszniewski

Greek government tries to calm markets after bonds tumble. The zloty kept earlier gains due to solid PMI report. Mixed US reports with no clear influence in the markets. Rubble strengthened as oil rebounds.

Greece's prime minister Alexis Tsipras in as press statement released during weekend said that Athens are seeking compromise with the European partners that would satisfy both sides. Head of the government reassured markets that Greece will fulfill its obligations to countries that helped it after crisis hit.

The statement comes after a damaging week in the Greek financial markets. On last Friday Greek three year bonds yields rose to as much as 19.50 percent – the highest level since 2012 when the country was near of leaving the euro zone. In addition, the financial sector in Greek stock market lost almost 40 percent since Syriza took power.

A mounting pressure from financial markets put new Greek government in difficult position. The leftist Syriza economic plan would have been very hard to implement even in supporting market conditions. Thus, given recent developments, Alexis Tsipras had to soften his rhetoric, as he needs money from bailout program and financial markets to run government's normal work.

The Greek government is aware of limitations that it has to struggle. Although Syrizy will likely seek to write down some of its debt, its stance will be more balanced. As a result, the Greek risk factor is less damaging for market and the euro is more stable.

Oil helped rubble

The PMI report from Russia was next indicator that pointed at more severe economic deterioration. The measure dropped deeper below 50 – the level that separates expansion from contraction. It stood at 47.6 against 48.9 in December – the lowest level since June 2009.

The report revealed the damage to the economy caused by a drop in oil price and sanctions imposed on country over the Ukrainian crisis. The GDP growth in 2014 stood at 0.6 percent and the economy is expected to shrink 3.6 percent in the first half of 2015 – the central bank said. The inflation stood at 11.4 percent and is expected to increase to 15.17 percent within few months.

However, in spite of poor reports the rubble was strengthened. The currency was helped by the increase of oil price that was lifted due to strikes in the US refinery that provides 10 percent of output. Oil price moved above 50 dollars in the US and 55 in London. Nevertheless, this move is rather a correction than a change in the trend. Thus, when strike is over, that impact of this factor will vanish.

Next US slippage

Last Friday the US GDP data missed expectations. Today's reports also didn't match projections – the household's consumption declined 0.3 percent – the largest drop in five years. However, other reports – income data and PCE inflation – were in line with forecasts. The ISM report – the major growth indicator for industrial sector – also stood below expectations. Although earlier reports have not affected the EUR/USD, this reading has – it moved higher.

Although the headline readings disappoint, the EUR/USD is near its 11-years lows. On last Friday James Bullard from the Fed said that the central bank will probably increase rates in June or July. This factor is the major driver for the dollar and it is still valid.

The zloty gave away some gains

The Monetary Policy Council decides on rates on Wednesday. Although monetary authorities will not change rates, they have to assess the situation on the money market (points at cuts) and the ECB decision to launch QE (also points at cuts).

If the MPC says that there is need for adjustment, the zloty will be negatively affected. However, the MPC will be rather cautious in declaring any changes, thus the Polish currency may be lifted. The second scenario is more probable as the PMI report was very good.

The zloty in the second part of the day gave away some of its gains. Until the MPC decides on rates, the Polish currency will remain under the influence of the broad markets. Thus it will stabilize with some prospect for gains.

2 Feb 2015 17:21|Artur Wiszniewski

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

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