Afternoon analysis 09.12.2014

The Greek crisis returned on headlines. The pound dropped as weak data deferred interest rates hikes. Next German slippage. The unclear weakness of the dollar.

The uncertainty concerning the future of Greece has heightened risk aversion in the markets. It materialized in significant losses in the European stock markets – the market in Athens posted losses of as much as 11 percent. The Greek government bonds also fell – yields on 10-year notes rose to 7.6 percent – the highest level in Europe.

This situation in a result of the Greek prime minister Antonis Samaras decision to call snap presidential election. His prime goal was to enforce coalition government position before the final talks with the Troika. The Greek government aims to leave bailout as soon as possible due to growing discontent in society that struggle with fiscal austerity. However, the Troika is unwilling to disburse the latest payment as the country hasn't met its obligations to introduce expected reforms.

In Greece the president is elected by the parliament in three rounds of voting. To be elected, a candidate needs 200 votes in the first vote and the needed number drops to 180 in the last voting. The problem is that ruling coalition has only 155 votes and may fail to hoard the rest. If parliament fails, there will be snap election in January.

As a result, SYRIZA party that leaders in polls may win the next year election. The left-wind party said that it will drop reforms imposed in a bailout program and leave the euro zone. This scenario spurs anxiety that the monetary union may again face the threat of being dissolved. However, today's information from Greece didn't impact the euro, but only stock and bond markets.

The German slippage

Data on trade balance in Germany was vague as industrial production report was also somewhat disruptive (more in our yesterdays commentary). The trade balance stood at 20.6 billion euro – more than 18.5 billion expected. It was due to better exports result (it fell 0.5 percent form the previous month, less than minus 1.5 percent projected) and more severe imports drop (3.1 percent against minus 1.5 percent expected).

All in all, falling international trade turnover signals that the economy is slowing down. It was also shown by the PMI reports and industrial production data. Growing problems of German economy increases the probability of full quantitative easing as slower growth may soften the Bundesbank stance that is opposed to purchases of government bonds.

Today this factor didn't influence the EUR/USD as it moved higher after the Federal Reserve member cooled expectation for faster rates hikes (a wider view in our morning commentary). Investors overestimated the odds for earlier rates hikes after very good data from labor market. The main interest rate will be increased in mid 2015, according to prevailing consensus.

The pound dropped

Today's data from the UK manufacturing sector pushed the pound lower as it missed estimates. In October industrial production dropped 0.1 percent on a monthly basis against expected increase of 0.2 percent. It rose 0.7 percent in the previous month. Production rose 1.1 percent on a yearly basis – less than 1.8 percent expected.

The recent data from the UK suggest that the economy is slowing. Although the British economy – next to the US – is the best performer among developed countries, the latest deterioration in macroeconomic data shifts interest rates hikes later in 2015. The Bank of England said that rates increases will be stretched in time, mild and rather later than sooner.

Given current circumstances, this puts the pound in a weaker position against the major currencies. There is no doubt, that the Federal Reserve will be the first major central bank to rise rates in 2015. The European Central Bank, however in the long term is moving toward full QE, in the short term it has decreased the pace of this move after Mario Draghi said that monetary authorities need to assess situation before introducing additional measures. As a result, the pound dropped against the euro.

The zloty stable and willing to gain

Developments on the Polish zloty market are coherent with our scenario presented earlier. The Polish currency after short correction returned to gains. A solid performance of the economy and no chance for interest rates cut in the near future are factors responsible for strengthening of the zloty. This move will be taking on pace as broad market sentiment improves.