Positive sentiment at risk (Afternoon analysis 25.05.2020)

The dominance of positive sentiment during the day of limited trade. The tightening of rhetoric in US-China relations may be one of the main threats to markets. The Polish currency is slightly stronger, but changes are limited.

Waiting for good data

Monday's trade on the broader market was marked with positive sentiment. The main indexes in Europe were gaining about 1-2.5% each. This is a result of the gradual lifting of restrictions imposed on economies due to the coronavirus. It is most likely that the effects of easing these restrictions in individual countries will attract the attention of market participants in the coming weeks and months.

Expectations are relatively high, as shown by the ifo institute's index of German business climate published today. It rose clearly above the estimates, while the assessment of the current situation turned out to be below expectations. The virus has affected individual economies to different degrees, and the restrictions and deadlines for their introduction and lifting have also varied. This may mean that the return to pre-pandemic conditions will not be evenly distributed, and some economies may do better, others worse. These are the effects that the market will see in the macro data in the coming months, and they will shape the sentiment later in the year.

As the election gets closer, the tighter the rhetoric becomes?

It is more and more apparent that relations between the USA and China are becoming a threat to positive sentiment in the broader market. A problematic trade agreement, limiting the trade of the US companies with one of the Chinese telecommunication giants, are also accompanied by growing tensions in Hong Kong after the announcement of the imposition of a new security law by China.

Currently, this information has limited impact on the market, but the escalation of the conflict may eventually weaken sentiment significantly, which would most likely result in supply pressure on emerging countries' currencies, including the zloty, and demand for the dollar. The upcoming US presidential election in November may be another element of uncertainty, as rhetoric on both sides could potentially get tougher.

The zloty is slightly stronger

The domination of positive sentiment and the absence of changes in the dollar (the EUR/USD exchange rate oscillates around Friday's closing level of 1.09) is usually good news for the zloty. It was no different today when the zloty appreciated in relation to most basic currencies. However, these were not significant changes (the limited range of fluctuations was supported by the lack of trade in the USA and the UK), the EUR/PLN exchange rate oscillated around 4.50, the USD/PLN pair was around 4.13 in the afternoon, but the zloty started to appreciate gradually.

However, this is mainly a reflection of global sentiment, rather than the domestic situation in Poland. Therefore, a change in sentiment (e.g. due to further tightening of rhetoric between the USA and China) may also negatively affect the Polish currency.