Afternoon analysis 17.11.2014

A recession in Japan only one of many problems. Investors reluctant to risky assets raises as the global economy faltered. Russia may face more sanctions. Risk aversion didn't affect the zloty as solid GDP numbers proved momentum. Draghi pushed the euro down.

Reports on the GDP growth in the euro zone's countries were better than estimated on average as the overall growth in the monetary union surpassed the expectations and Germany avoided a slippage into recession. Among the European Union countries Poland was a bright spot as the GDP rose 3.3 percent what was the highest result and it exceeded expectations for 2.8 percent.

Nevertheless, the anxiety concerning global economy was resurrected shortly as the Japanese GPD fell short to meet expectations. The release showed a contraction in a 1.6 percent pace annualized. The result was worse than a 2.2 percent growth expected by analyst surveyed by Bloomberg. As a result, the Japanese economy fell into recession after because the country posted a negative GDP growth in the second quarter as well.

The release showed that the optimistic assumption that an unorthodox monetary policy always helps to lift an economy from stagnation was overrated. Although countries like the United States and the United Kingdom posted quite positive results after the zero rates policy and quantitative easing was introduced, the instance of Japan disproves this assumption.

This experience is crucial for the euro zone countries that deliberate the possibility of the full quantitative easing (one that encompasses government bonds) after a cutting rates to a record low, a negative deposit rated and a launching of private assets purchases didn't result in a better economic performance or improvement in the labor market.

The strongest naysayer of the QE in the Bundesbank. The German central bank president Jens Weidmann reiterated his reluctance against government bonds purchases in the last week as this would create wrong incentives for governments to use lowered cost of credit to preserve social spending and to delay reforms. The Bundesbank emphasized that the QE doesn't work everywhere what was later confirmed by the Japanese data.

Nevertheless, the ECB President Mario Draghi said today at the European Parliament hearing that the ECB tasked its staff to work on preparation of further instruments to be prepared if needed. He also reaffirmed a goal to expand central bank's balance sheet to 2012 levels and reiterated the commitment to use additional unorthodox tools to fulfill targets. After the speech was published, the EUR/USD fell from 1.25 to 1.2450.

More Asian problems

For Japan a recession means a delay of the sales tax hike and opens the speculations that the Bank of Japan is to expand its stimulus. Moreover, the Japanese government may announce earlier election two years before scheduled as the ruling Democratic Party seeks to boost its support and get a stronger legitimization of its economic policy.

The Japanese developments stemmed from a discrepancy of the expected results of the economic policy and the reality. There is a similar situation with the Chinese economy, that encountered its own problems. China is facing the lowest growth in five years and a potential stress in financial sector. The Chinese banking watchdog informed that the growth in bad loans amount was the highest since 2005. That is a result of the bubble in the housing market.

Next to the US economy the Chinese and Japanese economies are the biggest in the world. The lack of growth among major world economies clouds the outlook for the global GDP growth.

Russia faces additional sanctions

The EU's financial ministers met in Brussels to discuss additional sanctions against Russia over the Ukrainian crisis. The odds for imposing more sanctions against Russia itself are low, bu the EUR government may hit pro-Russian separatists' leaders. The Russian president Vladimir Putin was criticized during the G20 meeting as fighting in eastern Ukraine continues in spite of ceasefire signed in Minsk.

The USD/RUB has been raising since the last week and now hovers near 47.20 against the all time high of 48.60 on 7 November. If new sanctions are imposed, the Russian currency will be weakened, but the drop may be limited as the Bank of Russia is ready to intervene in the market to shore up the currency.

The GDP report stabilizes the zloty

As the EUR/USD drop extended the zloty was stable. The Polish currency benefits from the solid GDP readings that was better than estimated. Given the recent data, the Monetary Policy Council is less likely to cut interest rates as the outlook for the economy improved. This view remains valid even as inflation fell unexpectedly.

Given the current circumstances, the zloty may strengthen in the short term and it will probably remain less susceptible for risk aversion jumps in the longer term.