News
CZ: Positive – S&P upgrades Czech LT foreign sovereign debt by two notches to AA-
HU: Negative – June retail sales came in well below market cons at negative 0.5%yoy, in theory would support rate cuts but NBH stays on hold
SK: Positive – S&P changes outlook to positive from stable and affirms A+ rating (p1)
PL: Dovish – July nominal retail sales slows to 8.2%yoy from 10.9%yoy almost 2pct below consensus
Today’s Events
PL: NPB release minutes of the July meeting / HU: HGB auctions (14/D, 17/A and 22/A) / RO: 10y ROMGB auction / SRB: 6M t-bill auctions
EEMEA Markets
Czech Republic: the S&P has upgraded Czech Republic by two notches to AA- citing changed methodology and prudent fiscal policy. Although upgrade was in the pipeline the two notches upgrade is definitely a positive surprise. We believe the biggest beneficiaries will be CZGBs which are still trading relatively wide to IRS (see chart). We issued a recommendation on the 1st of Aug to buy long dated CZGBs arguing that they offer value given defensive nature and value vs the Bunds. We believe this value is still there even at current levels given still wide spread vs. Bunds and CZK IRS (10y CZGB/Bund spread is at 105bp, down from about 140bp but still away from last 5y year average of around 75bp). See charts.
Slovakia: the S&P has increased the outlook to positive from stable. The positive rating dynamics coupled with the recent spread widening could attract increasing investor interest in SLOVGBs in our view. On the curve we currently see Slovgb 02/16 (130bp ASW), Slovgb 04/20 (150bp ASW) and SLOVGB 10/25 (180bp ASW) as the most attractive on the curve while they have the highest outstanding amounts at EUR2.7bn, EUR2.9bn and EUR2.1bn respectively. Due to very poor liquidity Slovgbs are not suitable for trading books but for long term investors they offer attractive alternative versus Bunds and versus regional and/or EMU peers. For our fundamental outlook please see our note (“Slovakia: A diamond in the rough”, in our latest EEMEA weekly)
Bond auctions in the region: Hungary, Romania and Serbia will hold auctions today. In Hungary will offer 14/D, 17/A and 22/A papers. Following the recent sharp rally we would wait for better levels before adding to HGB exposure but nevertheless following the Czech upgrade we see the better sentiment supporting the demand for HGBs. Romania will auction RON400mn ROMGB June 2021 papers. Following the sharp drop in HGB yields we note that ROMGBs are now offer the highest yields in the region. From valuation perspective 10y ROMGB around 7.60% (vs. 7.20% on HGB) looks attractive if one considers that Romanian CDS is about 100bp tighter than Hungary. Finally Serbia will auction 6M t-bills.
Click here to read the full report:
http://www.easyforexnews.net/wp-content/uploads/2011/08/eed_fi_250811_0000.pdf
Gyula Toth
UniCredit Research