Afternoon analysis 05.10.2015:
The euro and emerging market currencies supported by an improvement in the market sentiment. The stock markets increased due to stronger expectations that the major central bank may add more stimulus. The zloty started the week with broad strengthening.
On Friday, the US labor market data spoiled the market sentiment as the report missed the forecast. The reading showed an increase of 142k in employment. It was way below the 203k that was expected. Moreover, the wage growth stagnated and the participation rate declined.
On Monday, there was no nervousness in the markets. Risk appetite was strengthened by the expectations that the Federal Reserve will defer the interest rate hike. A similar scenario has been supported not only by the labor market deterioration, but also by the anxiety regarding the overall condition of the global economy. Investors in the futures market expect the Fed will hike at the beginning of 2016.
However, the market expectations are not in line with the Fed members comments. Eric Rosengren from the Boston Fed said that the labor market report showed that the central bank was right to leave rates at the zero level in September. However, he expects the Fed will increase the cost of credit this year, if the labor market does not deteriorate further.
Central banks may ease further
The US central bank is not going to tighten the policy any time soon. Other central banks like the European Central Bank and the Bank of Japan may even provide more stimulus. Market participants speculate that the Japanese central bank may announce additional measures as soon as Wednesday. The Japanese economy has slowed down recently. As a result, the pressure on the government and the central bank to provide more support has risen.
In addition, the European Central Bank may expand its stimulus. ECB President Mario Draghi is rather cautious and said that more data is needed to assess whether more stimulus is necessary. However, the overall impression made by the ECB suggests that there is a case for a bond buying program expansion. The latest reports from the eurozone economy revealed some deterioration. The inflation rate has returned to negative levels and the sentiment indexes for industry and service showed that the situation worsened.
Improvement in risk appetite in the broad market supported the zloty. The more dovish stance of the US monetary authorities will limit the capital outflow from the emerging markets. Moreover, the ECB and the Bank of Japan may provide more easing and support the revamp in expectations concerning the US monetary policy.
According to Bloomberg data, 12.4 billion dollars have been withdrawn from the ETF funds in the third quarter. It was the highest outflow since the first quarter of 2014, when it was 12.7 billion dollars. The more dovish stance of the major central banks will limit this phenomenon. A similar development may result in appreciation of the zloty and other emerging market currencies. The impact of this situation was visible in the Polish bond market. The yield on ten year bonds declined to 2.6 percent. It was the lowest level in five months.
However, the zloty may be negatively affected by the recent deterioration in the economic reports. On Tuesday, the Monetary Policy Council will reveal its rates decision. No change in the monetary policy is expected. However, if the monetary authorities express concerns regarding the economic conditions, it may launch speculations on rates cuts - a factor that may negatively affect the zloty. Moreover, the general elections in October stoked political risk. As a result, the zloty appreciation may be limited.
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 Cinkciarz.pl Sp. z o.o is prohibited.
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