Afternoon analysis 24.11.2014

The EU to spur investments by 300 billion euro fund. The zloty rose as the ECB and the PBOC spurred risk-taking.

The euro rebounded from its lowest level in two years as the Ifo index surprised (a wider view on this report in our morning commentary). Nevertheless, the movement will be rather short-lived as the European Central Bank president Mario Draghi announced that the central bank may introduce full quantitative easing.

In the previous week Draghi had two public speeches during which he said that the full quantitative easing – that encompasses government bonds – is possible if the economic environment deteriorates. Given current poor performance of the euro zone economy, odds for introducing a broad-based asset purchases are high. As a result, the euro will continue its move down and current rebound is probably a one-session event.

Moreover, Mario Draghi reassured about unanimity among members of the Governing Council. It means that he reached an agreement with the Bundesbank president Jens Weidmann or he managed to build a broad coalition that was able to limit Weidmann's influence. Although the second scenario is a more probable one, the bottom line is the euro remains currently under a heavy pressure from the ECB and it will continue to move down.

Risk appetite

Demand for high-yielding assets exploded after Draghi's speeches. It was also fueled by the People's Bank of China unexpected decision to cut interest rates for the first time since more than two years. Although the move was an answer to the weakness of the economy and rising tensions in the financial sector (bad loans rose by the most since 2005), it was taken as a signal that next major central bank is switching to a stimulus mode.

Reuters informed today that the PBOC will cut rates further and may ease credit condition to fend off deflation risk that may hurt the economy by spurring firm defaults and employment reduction. The agency cited its unofficial sources.

The EU puts 300 billion on table

The European Union is to start an investment fund that will have 21 billion euro of capital that will allow it to support 300 billion euro investment projects. It was a next sentiment-improving factor in the markets.

Currently the resurgence of the private investment is a crucial goal of the EU as the European Central Bank is capable only of creating a low-rate framework for the economy growth and it is not able to spur demand for credit as risk-aversion remains high. Thus, with the support of public funding companies may be more willing to spend money on new projects. As a result, the unemployment (still near its record high) may be reduced and the growth supported.

The zloty rose

The US market posted record highs and emerging countries currencies rose as central banks improved risk sentiment. The zloty was among gainers – the Polish currency posted significant moves against all its major pairs and it didn't look at domestic problems with local elections.

Tomorrow the latest data in November are scheduled. The Central Statistical Office will inform on unemployment rate (11.4 percent projected) and on retail sales (2.1 percent growth expected). Reports won't affect outlook for the zloty, if they are near consensus as currently the zloty's developments are determined by the broad market movements.

Given low probability for the interest rates cuts and very good market sentiment for the zloty will probably gain further. If the Monetary Policy Council don't surprise in December, the move may be continued in the short term.