Daily analysis 16.05.2016:
Weaker data from China had deteriorated the global sentiment to a minor degree. Oil is higher again, and Goldman Sachs expects its supply to be lower and its demand to be bigger in the short-term. Moody's left Poland's rating unchanged, but decreased the perspective. The zloty gains on value. Is it the end of anxieties regarding ratings for this year?
Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.
- No macro data that could significantly impact the analyzed currency pairs.
Weaker data from China
Data from China was weaker than expected. The industrial production in April increased 6.0% y/y, while the market expectations were 6.5% y/y. In comparison to the past year, retail sales was higher by 10.1% (the consensus was 10.6%). Moreover, investments were also below expectations. They increased by 10.5% y/y, while the expectations were at the level of positive 11.0%.
As a result, in April the monthly interpretation of the GDP reading (calculated by Bloomberg information agency) decreased to 6.9% y/y, in comparison to positive 7.1% y/y from March. However, it is worth remembering that recently the Chinese authorities began to warn that the economic growth cannot be significantly based on the increasing loan. This is because it causes a risk of a financial crisis.
Thus, it is possible that Beijing will withhold from new decreases in interest rates, as well as depreciations of obligatory reserve rates for the banks. This way, the current development may be slightly slower. However, in the long-term, as well as after the economy's transformation (from the one based on export, to the economy which is more dependent on internal consumption), this method may be received in a positive way. The reactions of the stock market from Shanghai, as well as the renminbi, were calm. Thus, there were no significant changes during the Asian session.
According to “GS” oil is higher and than lower
Since the beginning of the week, oil continues to grow. The WTI is evaluated above 47 USD per barrel, and the Brent costs more than 48.5 USD. These are their highest levels since November 2015. One of the elements that was supportive for today's quotations, was probably the Goldman Sachs report. Its authors took note that the demand for oil can overtake its supply in this quarter already, due to the Canadian fires, as well as the attacks on oil pipelines in Nigeria. According to “GS,” the production disturbances from recent weeks could decrease the mining by 1.5-2.0 million barrels per day.
Goldman Sachs increased the average price of oil for the second half of 2016 (from 45 USD to 50 USD per barrel). However, “GS” also estimates that the market will return to the global oversupply at the beginning of 2017. This will happen due to, “a higher than expected production from the USA, North Sea, Iraq, as well as Iran.” As a result, Goldman Sachs expects that the WTI will reach the level of 45 USD in the first quarter of 2017. In March, its price was estimated within the range of 55 USD per barrel.
A few words about the foreign market
The American data from the past week was better than expected. This, as well as the hawkish comments from Eric Rosegren, should cause the currency market to focus on Tuesday's inflation readings, publications from the real estate market, as well as on April's industrial production in the following days. Tomorrow's discussion regarding the economic situation between John Williams and Dennis Lockhart, which will be organized by Politico, may also be significant. If the data is relatively positive, and the FOMC representatives sustain Thursday's opinion from Rosengren, the dollar may be significantly stronger by as early as Wednesday. Moreover, this should also cause the EUR/USD to depreciate.
No changes in rating. Negative perspective
The zloty, as well as the bonds market, both reacted positively on the information that Moody's left Poland's rating unchanged, and only decreased its perspective from neutral to negative. Before noon, the EUR/PLN decreased to the area of 4.37, and the franc was slightly above 3.95 PLN. The profitability of the 10-year Polish debt decreased in comparison to Friday’s quotation by approximately eight base case points (to 2.93%).
Moody’s justified its decision in a slightly different way than Standard & Poor's in January. The agency divided its statement into two categories – one related to the expectations regarding the fiscal situation, and the other related to investment climate. The first category included the additional expenses related to the 500+ program (23 billion in 2017), as well as the plans for raising the tax-free amount, as well as a decrease in retirement age. The agency gave a negative note for the changes in the expenses rule.
The second category consisted of the plans to convert the loans denominated in the Swiss franc. They may have, “a clear impact on the loan supply, which will have consequences for the private consumption, as well as the investments,” if they are executed. Regarding the conflict against the Tribunal, Moody's notices that, “the crisis has a potential to impact investors' view on the Polish law and order (the rating parameters – author's footnote), as well as their will to invest.”
Is this the end of the rating discussion?
According to the calendar presented by the three leading agencies, Standard & Poor's will review the Polish rating on July 1st, as well as on December 2nd; Fitch will do it on July 15th, and Moody's on September 9th. This may theoretically mean that this year, Poland's loan credibility may be verified yet many times.
However, the risk of a negative development of the situation is relatively limited. That is of course, if the external situation is neutral, as well as if the current administration does not increase the expenses. It is also worth noting that Fitch confirmed its rating in January. Thus, it is very unlikely that it will be reduced in mid-July.
Moreover, when it comes to the decisions from Moody's and Standard & Poor's, the risk of a decrease in the forthcoming months is not high. The chances are approximately 33% that with a positive or a negative perspective, the rating will change within one or two years. Thus, if the additional risks mentioned by Moody's do not happen, and the economic increase is near the level of 3.5% y/y, the Polish loan credibility will not be changed by any of the main agencies.
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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