Daily analysis 04.09.2014

Confusion regarding news from Ukraine does not rule out the importance of weekend meeting in Minsk. Solid data from Germany. The ECB and ADP data in focus. The zloty remains around 4.20 per euro. Almost certain Polish rate cut in October.

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

• 13.45 CET: ECB interest rate decision.
• 14.15 CET: ADP data on US private employment.
• 14.30 CET: Mario Draghi conference after the ECB meeting.
• 14.30 CET: Weekly jobless claims from the US (survey 300k).
• 16.00 CET: US ISM non-manufacturing index (survey 57.5 points).

Closer? Germany. ECB. The US

It is hard to judge whether some confusion caused by the Ukrainian Presidential office was deliberate or it was just a result of interpretational mistakes. It is not of the markets concern, whether Putin's 7-point peace plan (which includes disarmament of the rebels, withdrawal of Ukrainian forces, foreign observers and etc.) is a result of the Kremlin’s weakness, Wales NATO summit or defeats of Kiev forces in the Lugansk region. No matter how strange it may sound, it is not in the interest of global managers to worry aboutwhether Donbas remains within Ukrainian borders or it becomes second South Osetia. Investors are interested only in one thing - whether the situation is going to improve soon. A better sentiment should spread around the markets, if all parties (including the separatists) attending the weekend meeting in Minsk agree on a complete cease-fire. The more concrete decisions being made, the more chances for, the so called, deescalation of the conflict. Beneficiaries of the improved situation include Russian stocks, ruble and EM currencies (especially the zloty and the forint). It is also worth noting that it is the most substantial attempt to calm down the situation in the East. This could potentially result in severe reactions – affirmatively, if the agreement is done and negatively, if talks fail to produce a consensus.

Fairly optimistic news came from Germany. Factory orders from the largest economy in Europe rose 4.6% m/m (seasonally adjusted). It is also worth pointing out that the reading is quite volatile (in June it was minus 2.7 m/m). Some help to interpret the data comes from the German Statistical office. Destatis (The German Federal Statistical Office) shows orders reflecting it’s origin – generated for the internal and external customers. Due to this fact , it can be observed that almost all growth came from countries outside the eurozone. Local demand also rose but the figures were modest. Overall, the data has given some hope for improvement especially from countries with a recent marked growth in the economy.

According to 51 out of 57economists who were surveyed by Bloomberg claim that the ECB will not cut interest rates. Only 6 forecast that the benchmark will drop by 10 basis points to 0.05%. This time it is worth agreeing with the majority. The second issue is a possibility of getting closer to the QE. A broader analysis was presented regarding this subject on Tuesday, however, it is still anticipated that the conference will be less dovish than expected and the market should initiate a correction which will probably exceed the 1.3200 level.

The ADP reading may be a small threat for this scenario. The data presented by a private agency, which runs jobs surveys, correlates much better with the official “payrolls”. As a result, a much higher ADP (above 250) might be seen, which may undermine the potential ECB rises. It does notmean that the base case scenario could really be deviated.

A certain rate cut

After Wednesday's MPC meeting we can be almost sure to see a rate cut in October. Such a conclusion can be taken both from the statement and Belka’s comments (he has clearly joined the dovish camp and with currently only 4 members who lean towards a cut, it is not crucial to build a broad consensus). According to the Q&A session an assumption can be formed that it will not be one deep cut (e.g. 50 bps), but two or three smaller moves. Thescale of the second decrease (in November) will depend on the new central bank economic projection. Currently, a significance in the growth slowdown can be seen, therefore, the 50 bps cut cannot be ruled out in November (to 1.75%).

The zloty slightly gained value after the decision to leave interest rates unchanged hit the wire. Nontheless, during the conference the EUR/PLN rose towards 4.20. It is also worth noting that the PLN ended the day a bit stronger, which was mainly as a result of the positive developments in the East.

The base case scenario for the EUR/PLN and CHF/PLN is a rage trade till the end of the week (4.20 and 3.48 respectively). However, if there are some positive developments (similar to the presentation made by Putin and, as the “WSJ” reported today, a quote from the Kremlin spokesman, the plan is not a “dogma”. An assumption can be made about the discussion and positive favorability for Ukraine) 1-2 zloty cents appreciation to the major currencies can be expected.

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

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