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Daily analysis 13.07.2016

13 Jul 2016 13:37|Marcin Lipka

New records in the American stock market, as well as a wear-off of the yen, improve the global sentiment. This phenomena is favorable for the pound as well. New statements from the Federal Reserve members. The zloty benefits from a decrease in risk aversion. However, the EUR/PLN remains above the 4.40 level.

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

  • 20.00: The Beige Book: description of economic situation in the particular Fed districts.

Pound is supported by positive sentiment

The basic index of the American stock market has yet again exceeded its historical peaks. Currently, it is near the 2150 level. If we look at the Japanese yen (another index of the global sentiment), its wear-off will also confirm a decrease in risk aversion. As a result, the emerging market currencies and the pound are gaining value.

The pound appreciation is also related to the appointment of Theresa May for the UK prime minister today. This decreases the general disturbance in the British Isles. However, it also means the first step on a long road to normalize UK relations with the EU after the Brexit referendum.

Investors are also wondering, which members of the Conservative Party will take the crucial posts, including the post of minister of finance, as well as of minister of foreign affairs. It is very likely that the market will receive well if George Osborne remains the minister of finance, or if the current minister of foreign affairs, Philip Hammond, is appointed for this post.

The person who will be in charge of negotiations regarding the future UK-EU contacts, is significant for the pound market as well. Theresa May suggested that this person should be a Brexit supporter. However, the group of Brexit supporters consists of people who are more willing to compromise, as well as people who may decrease the chances for access to the common market. This is most likely to be evaluated on the GBP immediately.

We must not forget of the Bank of England meeting tomorrow. Taking the economists expectations under consideration, the movement scale is rather wide. It may begin with the possibility of leaving interest rates unchanged, and end with the possibility of cutting them by 40-45 base case points, as well as an increase in quantitative easing. In our opinion, the Bank of England would rather hesitate between a 25 base case point decrease and the status quo. However, it may also hesitate to suggest the start of monetary easing at the August meeting. The new macroeconomic projections will be available by then.

Statements from FOMC representatives

In the past few hours, we have heard the statements of three representatives from the Federal Reserve. James Bullard claimed that Brexit's impact on the American economy will be, “near zero.” Moreover, when asked about the labor market, the St. Louis FOMC representative stated that the May reading was an anomaly.

Neel Kashkari was more cautious regarding Brexit. He said that, “nobody is certain what Brexit actually means. If it means that other counties will leave the euro zone, it may become significantly smaller.”

On the other hand, Loretta Mester presented quite an interesting argument regarding the monetary policy. She said that, “during moments of increased liquidity and capital flow to American treasury bonds, I focus less on inflation expectation signals from market inflation measurements and more on survey measurements.”

Mester's statement can be interpreted this way: the capital flow to treasury bonds decreases their profitability. This causes a depreciation of the future inflation on terminal contracts for interest rates, among others, suggesting lower inflation, as well as future loan costs. However, this is just a result of a strong capital flow that probably won’t be permanent.

It is crucial whether the more neutral Federal Reserve members will take note of this fact. If they do, this will suggest that the market's estimation of inflation, as well as the level of future interest rates, is too pessimistic. This may cause the tendency to turn, as well as profitability of treasury bonds to increase. This element would be positive for the USD.

Stronger zloty and Kowalczyk's statements

The Polish currency continues its gains due to positive global sentiment. However, these growths are rather limited in comparison to the other emerging market currencies. Before noon, the EUR/PLN stayed above the 4.40 level. It will probably be difficult to break this level before the Fitch decision on Friday, even taking into consideration that the worldwide increase in risk appetite would be sustained.

Getting back to the retirements topic that might be crucial for Poland's rating, it is worth presenting today's statement from minister Kowalczyk for Polsat News (cited by 300polityka.pl website). Regarding the cancellation of the topic of retirements from the government meeting yesterday, the minister claimed that, “nothing happened. The prime minister was absent at the government meeting yesterday. The good news for Poles regarding a decrease in retirement age… I think that it will be better if prime minister Szydło announces it.” Moreover, Kowalczyk suggested that it will occur in the next government meeting.

Even though it remains unknown whether a decrease in retirement age will be combined with the work record, it seems that it is more likely that the presidential project will be acclaimed by the government without any additional conditions. In our opinion, this will have a negative impact on the zloty, as well as the rating decision of Moody's in September.

13 Jul 2016 13:37|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.

See also:

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