Afternoon analysis 04.01.2016

, author:

Marcin Lipka

The eurozone data better than expected. Risk aversion increased due to the Chinese turmoil. The zloty remained under pressure.

During the first part of the session the currency market was affected by the situation in China. The factor resulted in heightened risk aversion on the markets that was reflected in the EUR/USD increase and the overall weakness of the emerging market currencies. However, in the second part of the session the euro gave away its earlier gains in spite of declines in the European and the US stock markets.

Europe's acceleration

Additional proof that the eurozone economic situation has improved was presented. The Eurozone PMI index exceeded the forecast and stood at 53.2. It was the highest reading since April 2014. Important thing was that the report showed expansion in all eurozone countries, including Greece. The Markit's report showed improvement in output growth, new orders and new export businesses. Moreover, the employment index signaled an ongoing improvement in the labor market.

Today's data showed that tools which the European Central Bank has introduced since mid-2014 started to work. Improvement is apparent in the credit market. Moreover, the unemployment rate dropped. Currently one can expect that the positive tendencies will be strengthened.

However, there is still no breakthrough in the inflation developments. Today's report from Germany showed that the inflation returning to the ECB's goal is still a distant future. In December the inflation rate stood at 0.3 percent against the 0.6 percent that was forecast. It was lower reading than in the prior month, when inflation stood at 0.4 percent.

The Chinese turmoil

Today trading in the Chinese stock market was stopped due to large prices drop. The market supervisor can stop trading if market index drops more than 7 percent.

Moreover, factors that sparked sale were weaker yuan (the lowest level since 2011 against the dollar) and weak reading of the PMI index (48.2 against the 49 that was forecast). In addition, the market drop would have been spurred due to expectation that the ban on sailing large stakes in companies may be lifted soon. The ban was imposed on 8 July 2015 for six months.

Given the Chinese turmoil, the emerging market currencies were pressured. It affected the zloty. As a result, the domestic factor were less important for the Polish currency.

The PMI index for the Polish industry was almost in line with the forecast. The gauge stood at 52.1 - unchanged from the previous months and little below the 52.3 that was expected.

The report showed a solid expansion of industry. The major tendencies apparent for a longer time have been maintained. Employment and output increased and there is still no price pressure. New orders growth eased, but export orders accelerated.

Although the PMI report was neutral for the zloty, the inflation data was negative. The CSO said the inflation rate stood at minus 0.5 percent against minus 0.6 percent in the prior month. The forecast was for minus 0.4 percent. As a result, pressure on the Monetary Policy Council increased to provide more interest rate cuts. As the risk aversion increase and the economic reports were weaker than expected the probability of further zloty's weakness increased.

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 the written permission from Sp. z o.o is prohibited.

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