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Afternoon analysis 11.01.2015

11 Jan 2016 17:53|Marcin Lipka

China is the major risk factor for investors. Emerging market currencies plunge. The zloty resumed decline in spite of easing risk aversion in the second part of the session.

The Chinese turmoil prevails in the markets. On Monday the Chinese stock extended last week's 10 percent decline by additional 5.3 percent drop. As a result, the risk aversion moved to other world markets.

The latest inflation data added to concerns. The producer prices index dropped 5.9 percent. It was 46th decline in a row. The consumer prices index increased 1.2 percent. Low price growth signals slack in the economy. Earlier, negative tendencies were shown by the PMI index and report on international trade.

However, after nervous beginning of the session, in the second part of the day risk aversion was limited. It was reflected by rebound in the European stock markets and rising of the US futures. In the currency market the EUR/USD dropped. The move was due to the fact the euro is financing currency in the carry trade transactions. As a result, the common currency drops when the sentiment improves.

Today's move was only a correction. Its extent will be determined by the news coming from China. Currently, there was no information that the situation improved in a significant manner, thus the probability that the rebound will continue is rather limited.

More QE in the eurozone?

China is the second largest world economy and the major commodity consumer. A slowdown in China means that negative pressure in the commodity market will hold and the prices may drop further. As a result, the inflation growth will stay suppressed.

Given the situation, the developments in China will be very important for central banks as they affect inflation. Moreover, if the export growth to China slows down, the GDP pace may decline. The problem is on time in the eurozone, where pressure mounts on the European Central Bank to provide more stimulus. Notably in the situation, when the latest inflation data shows deceleration in the price growth.

On Thursday the minutes from the December ECB meeting is scheduled. The reports will be important as the meeting was very relevant. Before the meeting the market participants had expected the ECB to increase the monthly amount of bond purchases. However, eventually the ECB left the limit unchanged. The release may provide a better view on arguments which were decisive for the ECB to leave the QE limit unchanged.

In the next two days the ECB members are scheduled to speak. Peter Praet and Sabine Lautenschläger may provide some insight on the ECB's plans for the near future. In the last week Philip Lane from the ECB said he sees room for more quantitative easing. Developments in China increased the probability of interest rate cut in March.

Zloty resumed declines

In the second part of the previous week the zloty halted drop. The Polish currency managed to recoup some losses against the dollar and the pound. It was stable against the euro and the Swiss franc. However, the zloty returned to decline on Monday, as other emerging market currencies did. The Russian ruble dropped on record against the dollar as the USD/RUB moved near 76.

Additional negative factor for the zloty was inflation data that missed the forecast. Given the situation, the probability of a stronger zloty is rather limited.

11 Jan 2016 17:53|Marcin Lipka

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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