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Daily analysis 01.09.2015

1 Sept 2015 13:26|Marcin Lipka

The stock markets and China generate a rebound on the EUR/USD. Oil increased by 25% since the middle of last week, but the reasons for this appreciation are quite weak. Surprisingly weak readings of the PMI from Poland do not have a bigger impact on the zloty for the time being.

Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.

  • 16.00: Reading of the industrial ISM from the USA (estimations: 52.5 points).

Stock markets go down, EUR/USD goes up

Once again the market returns to the dependency known for a few weeks. When the stock markets, or the contracts for the American shares depreciate, the EUR/USD increases. It is a consequence of an overlap of two reasons. First of all, by an increase in aversion towards risk, positions of carry trade financed in the euro are liquidated. The capital comes back to the common currency from the emerging markets and causes appreciation.

Additionally, when the quotations on the stock markets are weak and the variability of rates is bigger, the chance for hikes in the USA decreases. First of all, due to the fact that the Fed does not want to add uncertainty to its decisions. Second of all, theoretically a well developed stock market is considered to be an index which accelerates the business cycle.

The overvalue of S&P 500 last night was caused by the PMI indexes again. The fact is that the publication of the final index showing the condition of enterprises, prepared by Markit and Caixin, was slightly better than the initial readings (47.3 vs 47.1 points). However, the official index, focusing more on the national companies, decreased to 49.7. This was the worst reading for 3 years and the third worst publication since the peak of 2008/2009 crisis.

In their publication, Markit and Caixin notes the emphasizing of the fact that the pace of deterioration of the enterprises' condition is the fastest since March 2009. The condition of export is also not optimistic and depreciates at the fastest pace for two years.

The situation does not look good in general. However, today's data, apart from a description of particular components in the publication of private companies, shows nothing new. The official data are also weak, but they overlap with the prognoses. They only confirm that the slowdown in China will either develop, or demand more definite actions from Beijing. They should regard fiscal, as well as monetary policy.

Is there a boom for oil?

Theoretically, an increase in oil's quotations by more than twenty percent, suggests it’s entering a period of a boom. However, the factors standing behind the appreciation of Brent or WTI appear to be relatively weak.

A rebound by a few percent from last week, was mainly a result of the majority of the market being set for further decreases. A part of the capital has probably taken advantage of this, and tried to raise the rate in order to “squeeze” short positions and then sell oil on higher levels.

Yesterday, on the other hand, it appeared that there were some fundamental reasons for appreciation. Information agencies found (in the monthly newsletter from OPEC) suggestions that cartel is “ready to speak with other producers”. Also yesterday, some information appeared that the representatives of Russia will meet the Venezuelans. This would fit very well to the OPEC announcement. Additionally, EIA reviewed slightly downwards estimations of oil produced in the USA in the first half-year. Even though this review was relatively small and resulted in 40k to 130k barrels per day (by production being more than 9 million barrels), it was also used to explain this increase.

Theoretically, all of the above reasons should cause a maximum increase of a few percent , especially that it is very unlikely for the OPEC and other producers to achieve an understanding. All of them are rather struggling to keep their shares, which is mostly a consequence of Saudi Arabia's strategy. Also, the period in which a demand for oil and its products is limited is approaching, and additionally refineries will now be facing seasonal standstills. Considering the maintaining overproduction of oil (approximately 2 million barrels per day) and Iran entering the game, this suggests the increases to be a short term aggressive correction, rather than a fundamental change of trends.

Few words about the foreign market

Sentiments on the stock market are quite weak before the beginning of the session in the USA. However, it is worth noting that a lot can change after the opening of the cash market, especially if the American ISM appears to be better than the consensus. Thus it is possible that when the pessimism will disappear from the floors on the other side of the ocean, the EUR/USD may even go below 1.12 by the end of the day.

Surprisingly weak PMI

Yesterday we wrote that the national reading of the PMI may be worse than expectations, due to the surveys possibly being conducted during the time of threat of shutting down the electrical energy, and during commotion in China. However, it is difficult to expect the decrease to be that strong, and instead of 54 points, the result will drop down to 51.

The survey was conducted by Markit. However, the outside situation and energetic situation, are not mentioned as reasons for the wear off. The report says only that “the pace of an increase in production, amount of new orders and export, were definitely weaker in all of these cases”. Considering the relatively good condition of the eurozone, it is surprising information. In order to come to more significant conclusions, September's publication is required. It will allow investors to find out whether this was only a short term deviation, or a disturbing sign regarding economic activity in the third and fourth quarter.

The reaction of the zloty indicates that for the time being investors see the weaker PMI as short term deviation. However, if the American stock markets finish today's session with solid negatives (opposite to the base case scenario), the EUR/PLN may even go quickly above 4.25.

Anticipated levels of PLN according to the EUR/USD rate:

Range EUR/USD 1.1150-1.1250 1.1250-1.1350 1.1050-1.1150
Range EUR/PLN 4.2100-4.2500 4.2200-4.2600 4.2000-4.2400
Range USD/PLN 3.7400-3.7800 3.7200-3.7600 3.7600-3.8000
Range CHF/PLN 3.8900-3.9300 3.8900-3.9300 3.8900-3.9300

Anticipated GBP/PLN levels according to the GBP/USD rate:

Range GBP/USD 1.5450-1.5550 1.5350-1.5450 1.5550-1.5650
Range GBP/PLN 5.7800-5.8200 5.7600-5.8000 5.8000-5.8400

1 Sept 2015 13:26|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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