Afternoon analysis 18.09.2015

, author:

Piotr Lonczak

Investors are seeking direction after the Fed. The EUR/USD was stable after a significant increase on Thursday. Weak economic reports hurt the zloty.

As expected, the Federal Reserve refrained from the interest rate hike. The zero-rate policy was maintained as the Fed pointed at the uncertainty concerning the emerging market economies. As a result, the economic condition of emerging countries has been included to the factors that decide whether the Fed will tighten the policy.

Moreover, the monetary authorities are seeking confirmation that the inflation rate will return to the Fed's goal in the medium term. Thus, the Fed is hoping to see some more proof that the labor market is getting stronger before deciding to increase rates. A drop in commodity prices was reflected in a lower forecast for the inflation rate.

Investors’ expectations for a hike have been postponed. The FOMC said in the forecast that rates will increase before the end of the year. The likelihood of a hike in December is 46 percent (according to Bloomberg).

Risk aversion

In general, the Fed is pleased with the US economic performance. However, there were some problems. A strong dollar hurts the net export, thus it lowers the GDP growth. Moreover, a low unemployment rate hides the fact that the labor force participation rate is very low and there are too many part-time workers.

Thus, investors in the stock markets took the Fed's decision as a negative factor. The FOMC reluctance to hike may be showing that the Fed is not sure whether the economy will sustain the current growth pace. As a result, some risk aversion was visible in the stock markets.

The European markets were severely hit. Slowdown in the emerging market economies poses a risk to the export growth. Moreover, a dovish Fed will result in a stronger euro, a factor that will hurt export. As a result, the situation adds to the pressure on the European Central Bank to act. Possible solutions are an extension or an increase of the quantitative easing.

Benoit Coeure from the European Central Bank said today that the divergence among the monetary policy in the eurozone and the US will diverge further. The ECB member said that the ECB may extend the QE if it is necessary.

Weak zloty

The Chinese stock market dropped 3.2 percent this week. It was the largest weekly decline in the last month. Investors are selling assets as they worry that the economy will continue to deteriorate and the government interventions will not support the market.

The Chinese turmoil has been a factor that has negatively affected the emerging market assets since June. As the Fed refrained from an interest rate hike due to the problems on the emerging markets, the Chinese reports will influence the risk assets even more.

After the Fed's decision one could have thought that it will positively affect the Central Eastern Europe currencies. On Thursday, the Czech krone and the Hungarian forint increased. Also, the zloty gained, but its move was smaller. The Polish currency was negatively affected by the weak economic data.

On Friday, the risk aversion was quite strong. As a result, the probability of a stronger zloty is currently lower, than it had been expected before the Fed statement.

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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