Afternoon analysis 18.01.2016

Risk aversion returned to the markets. Failed rebound in the European stock markets. The zloty made up for its losses after unexpected cut of the credit rating by the Standard & Poor's agency.

After negative beginning of the session, the stock indexes tried to rebound. However, the scale of the move was narrow. Eventually, the rebound failed and the indexes returned near morning levels, close to the Friday's close. The German DAX dropped 0.5 percent.

The currency market developments were similar. The euro after short heightened volatility in the begging of the session, it stabilized against the dollar. Later, the EUR/USD started to rise as the risk aversion increased. Moreover, the probability of the interest rate hikes in the US dropped, which weakened the dollar. Today the volatility is limited as the US investors are absent due to holiday.

The global market sentiment is negative as due to anxiety concerning the world economy. Information that Iran returned to the oil market hit the oil price and it dropped below the level of 28 dollars for the first time since 2003. Drop in the oil price and other commodities hurts the emerging market economies.

Moreover, China is an additional problem. Although the stocks in Shanghai ended slightly higher, the market was very volatile and it even dropped below the August 2015 lows. Given the situation, permanent stabilization in the market is not very likely at the moment.

The zloty made up for losses

Last Friday the Standard & Poor's agency cut Poland's rating to BBB+ from A-. It was large surprise as the rating outlook was positive. Currently, the rating outlook is negative, thus the grade may be lowered within two years.

The S&P said the decision was made due to institutional instability in Poland that may be further deteriorated. The agency cited a threat that the National Bank of Poland independence may be limited. Moreover, the S&P agency expects the government deficit t 3.2 percent GDP against the government forecast 2.8 percent. As a result, the risk that the excess deficit procedure may be imposed on Poland after it was dropped in 2015.

After the decision was announced, the zloty posted severe losses. The euro moved around 4.49 - the highest level in four years. The dollar moved above 4.10 for the first time since 2003. The franc moved above 4.10. It was the highest level since the Swiss National Bank dropped the currency peg a year ago.

On Monday the zloty exceeded drop. However, later the move was limited. And in the second part of the day, the Polish currency recouped some losses. Nevertheless, this move was only a correction. Even if the zloty rises in the short term, the scale of the appreciation will be limited. The euro may drop to the 4.40 level.

In addition, the S&P decision will limit the probability of interest rate cuts. The new Monetary Policy Member have not been eager to cut the credit cost. In the current circumstances, a similar scenario is even less probable. This factor may stabilize the zloty in some degree. However, the probability of a stronger zloty is currently very limited.