Afternoon analysis 22.04.2016

, author:

Piotr Lonczak

The Eurogroup reported a breakthrough in its negotiations with Greece. Heightened volatility after the ECB meeting. The zloty exceeded losses against all its major pairs as foreign investors leave.

Financial Times informed of a possible form of debt relief for Greece. Eurogroup Chairman Jeroen Dijsselbloem confirmed that the eurozone countries are all willing to consider some form of relief in exchange for reforms. However, the Dutch politician said a nominal reduction is not very likely.

The IMF pressured on debt relief for Athens. In this context, IMF Managing Director Christine Lagarde said that the Greek debt may be stabilized without a nominal cut. Given the situation, it is very likely that the Greek negotiations will end in the next week. As a result, the nation will receive funds from the bailout program.

In the last year, the Greek crisis was the major risk factor for the markets. During this turmoil, there were even some speculations that the eurozone may collapse. All in all, the negative scenario did not materialize and this risk factor will be soon mitigated.

Forecasts cut

The European Central Bank released the Survey of Professional Forecasters. The projections were cut for the GDP growth and inflation rate in the eurozone. The newest estimates assume 0.3 percent inflation in 2016 against 0.7 percent in the last report. Within the next two years, the price growth is expected to accelerate to 1.3 and 1.6 percent, respectively. The GDP growth is expected at 1.5 percent against 1.7 percent in the previous forecast. In the 2017-18 period, the economy may accelerate to 1.6 and 1.7 percent.

Although the economy will growth at a slower pace, the labor market situation is expected to improve to a wider extent. The unemployment rate is expected at 10.1 percent this year against 10.3 percent in the prior report. It may drop to 9.7 and 9.3 percent within the next two years.

Today's PMI indexes showed the expansion in the eurozone stabilizes at a low level. The broad index for the eurozone was slightly below the prior reading. Still, the expansion is uneven. The situation deteriorated in France, while Germany accelerated.

On Friday, heightened volatility prevailed in the markets and there was some aversion of risk. The major stock indexes dropped. This scenario could have been caused by the ECB meeting. In this context, Mario Draghi’s press conference yesterday disappointed as the ECB chief gave no new clues on any additional stimulus. As a result, the euro initially gained, but later the common currency dropped.

Zloty pressured

The volatility in the markets, coupled with some risk aversion, resulted in drop of the emerging market currencies. The zloty was weaker than the other currencies from this basket.

This could have been caused by rising a probability that the Moody's agency will cut the nation's rating after S&P lowered the grade in January. Given the situation, the investment attractiveness has recently deteriorated. The Bloomberg agency said that the Franklin Templeton bond fund cut its holding of the Polish debt to 3.5 percent. This was the lowest level in six years. Within the January-February period, international investors cut the Polish debt holdings by 10 percent. As a result, the zloty may drop even further.

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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