Afternoon analysis 25.04.2016

Risk aversion prevailed in the markets before the Federal Reserve meeting. The German Ifo index suggests ongoing improvement. The zloty posted severe losses. The euro is above 4.40 zlotys and the dollar is above 3.90 zlotys. The Swiss franc is above 4 zlotys.

On Monday, the market sentiment deteriorated further. Risk aversion prevailed in the stock markets. Today, all major indexes dropped. Moreover, the oil price declined with other basic commodities.

The factors responsible for the current situation are the expectations before the Fed's policy decision which is due on Wednesday. Although the Fed is expected to leave rates unchanged, the central bank may point at June as a possible moment for an interest rate hike. The US central bank officials have constantly been stating that two hikes this year will happen. In contrast, the future suggestions do not comply with this similar view.

The probability of a hike in June is about 20 percent. The need to adjust market expectations to the Fed's plans was the factor responsible for negative reactions in the markets.

Cautious optimism

In April, the Ifo index for the German economy dropped to 106.6 from 106.7 in the prior month. The reading was little below the forecast 107. However, the report suggests the strengthening of positive tendencies in the economy.

The comments in the report stressed that the assessment of the situation remains positive. Although the companies said the current situation deteriorated, the expectations for the future improved for the second time in a row. Moreover, the projection for the output level increased. Rising capacity utilization remains above the long term average.

However, the assessment of the current and future situation in wholesale and retail trade deteriorated. All in all, the measure remained above the long term averages. In contrast, the sentiment index in the construction sector turned positive. This was due to the improvement of the current situation, but the expectation for future developments remained negative.

The latest data from the German economy suggests that the economic slowdown was only transitory. Similar tendencies were shown by the ZEW index and the PMI reports. Moreover, the data on industrial production and international trade were better than expected. As a result, one can conclude that the rebound will continue in the eurozone. However, expansion remains subdued.

Zloty's slide

Developments in the zloty market suggests that the assessment of the Polish currency remains negative. The zloty posted losses against all its major pairs. The euro exceeded 4.41 and the dollar was up to 3.92 zlotys. The Swiss franc moved above 4 zlotys.

The zloty's drop could have been caused by the rising probability of a rating cut by the Moody's agency. Moreover, global investors may consider Polish assets as less attractive. On one hand, conservative investors may be reluctant to take risks due to heightened political turmoil. On the other hand, risk taking investors may seek higher yields. Given the situation, the zloty may drop even further.