Daily analysis 03.09.2014

Information about a complete truce in eastern Ukraine causes reshuffles on the markets. Record high reading of ISM from USA and PMI from Spain. Zloty reacts positively to the news from the East. Today's decisions of MPC are at the centre of attention.

Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.

• Between 12.00 CET and 14.00 CET the decision concerning interest rates.
• 16.00 CET: MPC press conference after Council's summit.
• 16.00 CET: Orders in industry from USA (+10.9% y/y).
• 20.00 CET: Beige Book from USA – state of American economy's condition according to regional departments of Fed.

Truce? USA and Europe

Today starts with optimistic information, although its weight depends on the details of the conversation between Poroshenko and Putin. First of all, let’s stick to the facts. At around 10 am the first important piece of information appeared, that the Presidents of Ukraine and Russia achieved an understanding concerning a constant truce in Donbas. Press agencies most probably refer to the short note published on Poroshenko's official website: (headline) “President of Ukraine discussed the conditions of a complete ceasefire with the President of Russia”. It continues on to explain that “the conversation resulted in an understanding about a permanent ceasefire in Donbas. Both parties have achieved a mutual understanding about the actions that will make establishing peace more simple”. This declaration was also announced on President Poroshenko's official Twitter account.

The Russian stock market reacted most positively to the information about the possible breakthrough in the East. It increased by over 4%. The possible decrease in tension has been received positively also by the rouble (fall on USD/RUB pair below the level of 37.00).The wider market is also being affected by the developments inthe East. Our region's currencies and the euro have enforced themselves and the contracts on S&P 500 have crossed the level of 2010 points for the first time ever. It is hard to be surprised by incoming comments to treatthe information from Kiev with caution. Depending on the opinion's source, concentration should be placed on whether it is a game of one of the sides. The national station, Russia Today, has also presented quite interesting news. The TV station, citing the Kremlin's spokesperson, claims that it had received information about Putin not being able to establish the conditions of the ceasefire as he asserts not being directly involved in this conflict (which is actually a logical consequence of the information coming from Moscow earlier).

However, the Russian reaction mentioned above does not exclude the possible resolution of the conflict. It is worth remembering, that if both sides will agree on a mutual understanding, they have to come out of it with their heads held high. Thus, there might appear to be some contradictory information. However, the issues mentioned above do not have to be understood as contradictory. Just yesterday Putin as well as Lavrov spoke about their desire for a peace solution. Nevertheless, the moment when both sides sit down and talk, and the fights in the region will cease, will be thereal test., At the moment, there is the biggest chance to end this war ever since it begun, thus explaining why the market's reaction is so optimistic.

The American ISM has increased to the highest level since March 2011. It is a result of shifting to a second, if not third, gear by the American industry. The index's main components have also increased very strongly (new orders up to 66.7, and the production to 64.5). The employment's component also remains strong (58.1), which is a good omen for Friday's data about the condition of the labour market.

There’s also good data coming from China and Spain – services PMI increased respectively to the level of 52.8 and 58.1. However, the comments of institutions holding these studies are not that compelling. The Chief of Chinese economists at HSBC Hongbin QE bank writes, that “apart from bouncing off in the main reading, the other indexes suggest a rather mixed picture than a wide improvement. Economic growth is constantly threatened due to the slowdown of the real estate sector in the second half of the year”. Also, the data from Spain, which are at their best since 2006, force us to remain in moderation in our optimistic judgement. Andrew Harker, Markit's senior economist emphasized that “the decreases of prices are and have been necessary to close the sales contracts, and employment's growth was only marginal”.

In summmary, there are still no solid conclusions concerning today's Poroshenko's peace discussion Just as the conflict has started slowly, it most probably will resolve in stages. Tomorrow, on the other hand, it will be worth remembering about the EBC summit (the scenario presented yesterday is still up-to-date), and also about ADP readings (they are recently becoming a good prediction of the “payrolls”). In the perspective of the forthcoming hours the limits of 1.3150 should be maintained.

Working off on PLN

In the morning the zloty was one of the biggest beneficiaries of the Ukrainian administration's discussion. EUR/PLN pair has descended in one movement by approximately two and 4.18XX on national currency's benchmark. This change is also a good example of how much “bonus” as a result of the conflict on Ukraine, is included in PLN rate. It can be easily assumed, that considering how uncertain Kiev's information is at the moment, the zloty can be evaluated by even PLN 0.05 - 0.10, because of the tension in the East.

The MPC decision cannot be ommited. However, considering the substanstial disturbance related with Poroshenko's comments, the hypothetical scenario of a slight enforcement related with maintenance of money rates on a constant level, can be weaker or dissembled in time (and because of that invisible). Council's opinion will also be very important (it should suggest a significant probability of interest rate decrease in the upcoming months). It is also worth paying attention to Marek Belka's answers. If there is a lot of hesitation concerning the future monetary policy's easing, a slight PLN strengthening can be anticipated.

In conclusion, quite unexpected information from Ukraine has disturbed the zloty's ratings before the result of MPC summit. However, if the Council will not give any clear signals of wanting to ease the monetary policy, PLN strengthening could be observed.

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

Expected GBP/PLN levels according to the GBP/PLN rate: