Afternoon analysis 28.08.2014

, author:

Piotr Lonczak

The Euro dropped amid increased geopolitical risk regarding Ukraine and concerns about efficiency of TLTRO. The zloty was battered by risk aversion.

Today is the last day for banks to submit documents to be eligible to participate in TLTRO auction. The European Central Bank in June announced unprecedented measures to boost credit growth and ensure price stability. ECB's decisions were lowering main interest rates on record, imposing negative deposit rate and launching the TLTROs (Targeted Long-Term Refinancing Operations) in September. In addition, EBC started to work on establishing market for asset backed securities.

The biggest Italian bank plan to bid for 27 billions Euro on September's auction, according to Bloomberg citing people with knowledge of the matter. Some commentators find this amount signaling lower demand for TLTRO than previously expected. In that case the tool introduced by the ECB may be not sufficient to significantly support the economy. That is negative factor for the Euro.

The TLTRO is the response to critics of ECB after similar operations in 2011 and 2012 were launched, when low-cost loans were used by bank to buy government bonds and didn't support the real economy. This time the money provided by ECB is supposed to go directly to companies and households (excluding housing credits).

Economists surveyed by Bloomberg expect that banks will borrow as much as 650 billions Euro thorough 2016. The ECB's president said that maximal supply of TLTRO will be about one trillion Euro.

Private credit is fading

The report from ECB showed that credit for private sector shrank more than anticipated. The credit fell 1.6 percent on yearly basis after dropping for 1.7 percent in the previous month, while it was expected to drop 1.5 percent. In the context of fading credit the concern will shift to speculations concerning TLTRO.

The German inflation was in line with expectations. The price index was flat on monthly basis and rose 0.8 percent from the previous year. Before releasing the figures there was rumors on possible drop of prices on monthly basis, that could increase the pressure on ECB to take bold actions. But because of non-surprising report and more important developments in the Ukraine readings from Germany went to the second plan. Now the focus shifts to tomorrow's report on inflation in the Euro Zone.

In the second quarter the U.S. GPD increased more that previously estimated. The second reading showed that growth stood at 4.2 percent, up from 4 percent in the previous calculation. In the first quarter the U.S. GDP fell by 2.1 percent. Additionally, unemployment claims fell to 298,00 from 299,00 in the previous week. The report was better than estimated. The recent data is favoring the dollar, which is again near its 11-months high.

The Euro fell to 1.3159 against the dollar – near to its 11-months lows.

The escalation of the Ukrainian crisis

Ukraine is again the main risk factor for the markets. After Tuesday's meeting between presidents of Russia and Ukraine there was little hope for normalizing of two nations' relations. Vladimir Putin and Petro Poroshenko both praised the outcome of the talks in Belarus – even the next meeting were scheduled and negotiations on restarting gas supplies were to begin in two days.

Nevertheless, the hope for easing the tensions disappeared very fast. First, Kiev said that the Russian armored column was captured in the Ukrainian soil. After that there were information on the Russian troops fighting alongside the rebels against the Ukrainian army.

Moreover, the Kremlin is going to send next convoy with humanitarian aid to Ukraine, what is exacerbating the situation, because the last similar transport crossed the border without permission form Kiev. The Ukrainian authorities were demanding presence of the Red Cross in the convoy, what was not fulfilled. Meanwhile, Ukraine, the U.S. and the E.U. all claim that the convoy is a hidden plan for stocking rebels.

The Ukrainian President Petro Poroshenko said that the Russia have invaded his country and the Prime minister Arseniy Yatsenyuk reiterated president's statement. Meanwhile, news agencies informed about seizing of next swath in southeast Ukraine by rebels supported by the Russian troops. The developments in the Ukraine pushed the Euro and the zloty lower and increased risk-aversion on the markets.

The zloty under pressure

The forthcoming interest rate cut in Poland due to exceptionally low inflation (first negative rate of price growth in history) and deterioration of economic data (especially worse than expected labor market data) are negatively affecting the zloty. The Polish currency is going to lose part of its positive interest rate differentiation and as a result is more susceptible for increase of risk aversion. Moreover, the zloty was affected by yesterday's statement of prime minister Donald Tusk, who presented new incentives for families and pensioners before forthcoming local and latter parliamentary elections.

The zloty fell to the lowest level in this week. The USD/PLN rose above 3.20 – the highest level since September 2013. The Euro went to 4.21 – the highest since March. The franc rose to near 3.50 zloty and the pound went to 5.31 zloty.

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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