Afternoon analysis 03.09.2014

Rumors of ceasefire in Ukraine fueled risk-taking in the markets. The eurozone data showed poor economic landscape. The Polish MPC didn't surprise. The zloty rose against its major pairs.

The eurozone data showed lackluster growth. Retail sales fell 0.4 percent on a monthly basis, after an 0.3 percent gain (revised from 0.4 percent) in the previous month. The result was in line with expectations. The sales growth dropped to 0.8 percent on yearly basis from 1.9 percent (revised from 2.4 percent) last time, compared with an estimate of 0.9 percent growth.

Those were yet another set of poor figures from the eurozone. In the morning disappointing PMI reports were shown. The data for three key eurozone economies – Germany, France and Italy – were worse than expected and down from the previous month. Moreover, the broad gauge for eurozone dropped to 53.1 from 54.2, lower than 53.5 estimated in the first reading. Allegedly, Spain was a positive exception– the PMI rose to the highest level since 2006 – but a more careful reading of the Markit report curbed the enthusiasm due to labor market weakness.

The pound plunged

Support for independence of Scotland increased lately, is pummelling the pound. The recent survey showed the advantage of opponents shrank to a 6 percentage point form 14 pp. in the previous survey (only among people willing to vote). The British currency touched today its lowest since the middle of February.

From the perspective of the British economy the consequences of the Scottish secession are unpredictable. In turn, the pound didn't exploit solid PMI growth – gauge rose to 60.5 from 59.1, exceeding projection for a drop to 58.5. In the afternoon the GBP/USD was little changed to 1.646.

Closer ceasefire?

Before noon the Ukrainian President Petro Poroshenko informed, that he agreed permanent ceasefire with the Russian leader Vladimir Putin. The news bolstered stock markets, the euro and high-yielding currencies (the zloty, the ruble). However, only a few moments later the Russian side announced that no agreement was ever made, due to the Moscow party party not being involved in the conflict. This statement has been constantly reiterated by the Kremlin since the beginning of the crisis. Ukraine later changed Poroshenko's statement on his official site.

Although the Ukrainian impulse was weakened, the market sentiment remained positive. Investors seem to believe that agreement between Ukraine and Russia is being forged. To this extent it gives hope to the end of the conflict in the near future. In addition, it may lead to softening possible sanctions against Russia, that The European Commission is currently working on.

In recent days the German Chancellor Angela Merkel said the European Union will accept the cost of additional sanctions to stem the Russian expansion in Ukraine. Given the current situation, the stance of E.U. may be mitigated.

No surprise from the MPC

As expected, the Polish Monetary Policy Council left interest rates unchanged. The main rate was left at 2.50 percent – the lowest level in history. The last time interest rates were changed was in July 2013, when the MPC cut the cost of credit for 25 basis points.

The zloty rose after the MPC announced its decision. Although from the perspective of the Polish currency press conference of Marek Belka was more important. The President of the National Bank of Poland said interest rates will be adjusted if the incoming data show a significant slowing of the economic growth. Marek Belka cited the Ukrainian crisis as a key risk factor for Poland and said that the MPC will probably cut interest rates more than once. However, the NBP President refrained to give the total amount of cuts.

The zloty rose significantly after the Ukrainian authorities signaled a closeup with Russia on ceasefire. Nevertheless, the press conference of the NBP President weakened slightly the Polish currency. The euro fell to 4.194 and the dollar to 3.19. The pound dropped to 5.25 and the frank to 3.47.