News
CZ: Neutral – CNB keeps monetary policy unchanged, indicates a delay in the first hike by a quarter / Negative – June retail sales including the auto segment dropped 3.5% yoy (p2)
KZ: Positive – Major government owned oil company completed the syndication of a USD1bn term loan facility (p2)
RO: Negative – MinFin sold RON0.37bn of 5Y RONGB, half of the planned RON0.7bn / Negative – June Wages increased 3.5% yoy, falling behind the inflation (p2)
TK: Mixed – CBT cuts policy rate by 50bp, restarts FX selling auctions (p2)
Today’s Events
CZ: July International reserves / ES: July CPI / HU: June IP (Preliminary), Budget lvl YTD / LN: July PPI / RO: June Industrial sales / RU: July CPI, July International reserves / UA: July CPI and PPI
EEMEA Markets
Global backdrop: significant rally (with bull flattening) in G3 bond markets (l0y UST and Bunds tightening by more than 20bp), ongoing funding pressure on the USD (EUR/USD 1y basis swaps moving further north and US custodian implementing negative rates on USD cash deposits) and heavy sell-off in the US, Asian equity markets are all setting a very bearish tone for CEEMEA markets this morning. Given the extreme negative mood any positive surprise on the NFP might at least stabilize market sentiment going into the weekend. In CEEME we are also turning more bearish and recommend establishing bearish positions on HUF and TRY. In the local currency bond space we see CZGBs as a very attractive investment in the current environment. In HGB we are watching for signs of capitulation especially from non-resident investors.
After all it looks like that the CBT is the first central banks which called the global double dip by cutting 50bp at an extraordinary meeting. The bank is also trying to kill two birds with one stone by restarting USD selling auctions (without preannounced size). The bank also raised the O/N borrowing rate to 500bp from 150bp. As a knee jerk reaction the USD/TRY moved to new highs whilst bond rallied about 20/30bp across the curve. We believe the cleanest trade from here is a long USD/TRY position. Apart from the clear desire of CBT to ease monetary conditions further we believe not overly bearish market positioning is also a supportive factor for long USD/TRY (risk reversals are nowhere near to the level where they should be based on the current spot rate and comparing to 2008). The main risk to this call at this stage is the actual volume of the FX selling auction today. We note that the CBT has sold FX in auction form in March 2009 and the volume was USD50mn. We recommend long USD/TRY positions with a target at 1.77. In the credit markets we maintain our bearish bias (vs Romania) as the market may see the rate cut combined with potential FX reserve loss as credit negative. We expect the current 50bp spread to move to flat. To the extent the credit market is moving into outright bearish trajectory buying outright Turkey 5y CDS also makes sense in our view. The surprise rate cut obviously did not help our 2y/10y TRY flattener position and we recommend moving the trade on hold.
Hungarian credit significantly underperformed (Hungary 5y CDS widening by as much as 25bp vs an 10bp widening of the Sovx) as the market remains puzzled with the moratorium request of the local governments and more broadly by the significant pressure on private sector balance sheets from the all time high CHF/HUF. This has naturally started market rumours of potential intervention by the NBH. We think if anything maybe the AKK is present on the market which in theory should convert about EUR2.5bn non HUF assets from the pension fund assets. Notwithstanding this we believe the as the HUF has lagged the sell-off in the credit market whilst the local banking sector is experiencing increasing FX liquidity pressure we recommend buying EUR/HUF positions at current levels with a target at 277 and stop loss at 269. The big question for us is what to do in the bond market as the HGB curve is the only one which is not benefiting from the significant bond market rally and yields are widening on the back of risk proxy trade. Despite the common belief that non resident positioning is heavy we so far we did not see signs of capitulation from non-resident investors.
Meanwhile the Czech Republic remains the safe heaven of CEE as CZGBs are finally catching up to Bunds. Long end CZGB curve rallying by about 10bp. As we noted in our recent note we believe the long end CZGBs offer very attractive defensive opportunity and we scope for at least 50bp yield compression at the 10Y segment. The main reservation looks to be limited liquidity but believe the attractive valuation compensates for this.
Romania: EUR/RON has been remarkably stable yesterday while the 5y ROMGB auction went relatively poorly. We remain structurally constructive on Romania but against the current market backdrop we would play only as a relative value play. We note for instance that Romanian credit significantly outperformed Hungary and Croatia. We do not believe we are at a stage where the reversal trades should be put on. We nevertheless still see scope for outperformance versus Turkey. In the local currency space we see outperformance versus Hungary.
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Gyula Toth
UniCredit Research