Daily analysis 05.08.2014

Mixed signals for the markets – solid session in the US but Chinese services PMIs at all-time lows. Banco Espirito Santo should not affect the sentiment again. Interesting analysis on the ECB shift. The zloty remains fairly stable and no major moves are expected in hours to come.

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

• 16.00 CET: Factory orders (survey: +0.6% m/m).
• 16.00 CET: Services ISM from the US (survey 56.5 points).

Stable. BES. Draghi and Weidmann

The US equities enjoyed quite solid gains yesterday with S&P 500 adding 0.75%, but the weak services PMI from China worsened the sentiment just before the European session. Adding slightly weaker final Purchasing Mangers Index from the Euro Zone we are coming back below 1.3400 on the EUR/USD.

According to HSBC and Markit, the services PMI from China dropped to the lowest level on record (since 2005). Last month it slided from 53.1 reported last month to 50.0 in July. Despite the fact that the markets pay much less attention to the services data than to the manufacturing publications, it is worth noting what caused such a slump. Hongbin Qu, the chief Chinese economist at HSCB, claims that “the weakness in the headline number likely reflects the impact on the ongoing property slowdown in many cities as property related activity, such as agencies and residential services see less business”. Qu, however, predicts that situation should not get worse saying that “in the coming months, we think the services may get some support form the recovery in investments”.

Markets should quickly forget the Banco Espirito Santo (BES) case. The bankruptcy procedure of the second-largest Portuguese bank was well prepared. The BES was divided into two institutions (Novo Banco) and the so-called bad bank which preserved the old name “BES”. All deposits and senior bonds will be transferred to the Novo Banco and almost 5 billion Euro is supposed to be injected to the new institution (money will come for the old rescue fund provided a few years ago by the EU and IMF) while junior bondholders and stockholders will stay at BES. Later the Novo Banco will be probably sold and the government is expected to recover some money. The BES probably will go bankrupt and the most known casualty of this action is Credit Agricole (second largest stockholder of the BES). The “CA” was already severely hit by the Portugal issue reporting its net income dropped to almost zero after the costs related to the BES. Overall, it is worth noting that the rescue process gone pretty smoothly and it didn't affect significant sovereign bonds.

David Marsh did prepare an interesting analysis on the “MarketWatch” website. He claims that Jens Weidmann (Bundesbank chief) may become the ECB head. It is possible that such a shift may happen before October 2019 (date when Mario Draghi's term ends). Marsh wrote that the current Italian president Giorgio Napolitano will probably step down on his 90th birthday (June 29, 2015). Mario Draghi is “a clear favorite to succeed him according to the former “FT” reporter. If that was the case, we may imagine that the future ECB policy would be much more hawkish and the Euro should benefit long before the actual decision is announced. We can assume that maybe during the Thursday's ECB conference the subject brings more attention.

Summarizing, Mario Draghi conference is still the most expected event his week. However, the rebound generated on Friday seems to be loosing steam and the odds for further gains after the ECB meeting decreasing. Today we should not move far from 1.3400 level in either direction.

No major changes

The zloty has still been benefiting from improved sentiment but the correction lost some momentum in the recent hours. Due to lack of macroeconomic news from the local economy, investors should be focus on global events. The Polish currency will be mostly affected by the ECB conference but still the moves should not be that significant and the changes during Mario Daghi statement probably will not exceed a quarter of one percent in either way.

It is also worth observing the US stocks. They seem to be a good benchmark for the global sentiment currently. If we see further gains across the pond the PLN may benefit, whereas the S&P 500 slide should push the zloty lower.

Overall, both today's and tomorrow's session should be quite calm and the EUR/PLN will probably remain in a narrow range between 4.16 and 4.18.

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

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