Unstable situation (Daily analysis 16.02.2018)

Investors ignored negative signals from the US economy. Although there are some risks, the general sentiment of the market is positive. The zloty benefited from the globally cheap dollar. Moreover, if global sentiment deteriorates, the Polish currency may clearly depreciate.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

• 2:30 p.m.: January's situation on the real estate market in the US. Building permits (estimates: 1.3 million annualised). Housing starts (1.23 million),
• 4:00 p.m.: University of Michigan Consumer Sentiment Index (estimate: 95.4 pts).

Crazy market sentiment

Last week was full of record-breaking declines for US indexes. On the other hand, increases from the last five trading sessions at the S&P 500 were the highest in 7 years according to Bloomberg’s expectations.

A rebound after a sharp depreciation is natural, but the past two upward sessions were particularly surprising. On Wednesday, investors ignored weak retail sales data and inflation that was higher than the consensus. Yesterday was the same. Production inflation (PPI) accelerated and industrial production was clearly in the red at negative 0.1% MOM vs. +0.2% MOM.

Even taking into account the negative publication for January, it is disturbing. Especially the manufacturing production appears to be in weak condition. It remained stable for the second consecutive month and January's readings were at 1.8% year-on-year. This weak result suggests that the US economy may be worse than indicated.

The combination of a higher inflation level and a weaker economic condition shouldn’t be favourable for the share market. Investors have started to wonder whether the fiscal stimulus has been well addressed and if it will actually raise potential growth or only increase consumption and inflation without actually improving competitiveness. Currently though, the market seems to have ignored these warnings.

On the other hand, changes in currencies resemble greater global uncertainty, but these reactions are consistently suppressed. Among other things, the franc and the yen remained relatively strong (currencies appreciate when risk aversion occurs). However, no concern is noticed on the majority of emerging countries' currencies.

Although the economic data is not favourable for the US economy, the dollar should appreciate if risk aversion increases. The market should count on the Fed, which will raise interest rates faster. Negative sentiment should result in the capital's return to the USA because any significant economic depreciation of the US economy should quickly translate into a worse sentiment in other countries. Generally, if a further acceleration of inflation or a slowdown in economic growth are observed, then a strengthening over a weakening of the dollar may be noticed. Maintaining positive sentiment is negative for the dollar.

Strong and stable zloty

In the morning, USD/PLN quotations fell close to 3.31, (near three years lows). Moreover, the dollar was already more expensive at 0.02 PLN due to a slight deterioration of the global sentiment. The EUR/PLN pair remained within a relatively limited range of fluctuations (4.15 - 4.16).

Significant declines in the US market may be a major threat to the zloty. On contrary to a relatively calm reaction to the last strong sale of shares in the USA, it seems that the zloty's reaction would probably be more evident. However, as long as the sentiment in the New York market remains optimistic, the changes in the zloty are likely to be moderate and the Polish currency will maintain most of the recently gained increases.