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Afternoon analysis 05.01.2015

5 Jan 2015 17:18|Artur Wiszniewski

Greek political turmoil pushed the euro at eight-year lows. Little improvement of investors' sentiment before QE decisions. The zloty gained in the second part of today's session.

The euro dropped to its eight-year-low as the risk that Greece may leave the euro zone increased. German newspaper Der Spiegel informed that German government prepared a plan in the case of Syriza win what may lead to breakup of the currency union. The very existence of this plan is viewed as an agreement to a similar solution.

Although Berlin denied that any draft was prepared, the markets' reaction was very significant. The euro dropped to the lowest level since 2006.

The failure of Antonis Samaras to elect his presidential candidate resulted in snap election (due Jan. 25). Today the largest risk is that left wing Syriza – that is leading polls – will take over the power and form a government. The party is willing to undo crucial austerity reforms, renegotiate debt payments and is saying that it will increase wages and pensions.

The political uncertainty in Greece increased the pressure on the euro, that was earlier hit by comments for the European Central Bank President. Mario Draghi said last week that the full quantitative easing – an asset purchase program that encompasses government bonds – is getting more probable as monetary union may face deflation.

This factor puts the euro in very bad position against the dollar as the Federal Reserve is moving toward interest rates hikes within six months. The inflation growth is expected to be negative for the first time in five years, according to Bloomberg survey. Economists expect that annual rates of inflation stood at minus 0.1 percent in December. The data is due Jan. 8.

The Sentix index – a measure of investors' sentiment – slightly improved in January. The gauge stood at 0.9 – up from minus 2.50 in the previous month and more than minus 1.0 expected by analysts. The improvement is not surprising as the ECB is near to launch QE – the program that will certainly push stocks and bonds higher.

Greece impact is tamed

The Greece turmoil has different impact on markets than it had in the earlier phases of the crisis. A jump of Greek bond yields was not followed by similar developments in countries with weak public finance. Conversely, in recent period one could observe a drop of yields to the lowest levels in history in many countries.

Although, the Greece political crisis should not be ignored, this time one is not seeing any contagion effect. This is due to improvement of euro zone's financial infrastructure that safeguards its stability (Banking Union, European Stabilization Mechanism).

An example of better response to a potential crisis was the Banco Espírito Santo case at the beginning of the second half of 2014. The impact of major Portugal bank was tamed efficiently and there was no contagion effect. Only Portugal financial market was impacted significantly. Given current circumstances, one can expect that in the case of Greek crisis the scenario will be similar.

The zloty tamed losses

The zloty has been negatively impacted by heightened risk aversion. The USD/PLN rose above 3.60 – the highest level since March 2009. The euro was also up, however the EUR/PLN didn't manage to surpass its 2012 highs. The volatility of the zloty is still very high. The Polish currency recouped some losses in the second part of session.

This week the zloty will remain under influence of broad market trends as Poland's economic calendar is empty. The release of FOMC minutes and later inflation data from the euro zone will determine market's developments. On Friday the data on the US labor market is due.

Expectations before this week data favor the dollar against the euro. Given this circumstance, the zloty won't find any support in the broad market and the domestic currency will remain rather weak.

5 Jan 2015 17:18|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.

See also:

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Daily analysis 05.01.2015

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