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Emerging Markets Commentary

Central European Countries:

February PMI numbers released last Tuesday for Hungary, the Czech Republic and Poland (CEE economies) were generally quite strong. The PMI increased for both Poland and Hungary to 52.8 and 54.8 (from 50.9 and 53.1 in January), respectively. In the Czech Republic, it fell slightly to 55.5 in February from 56.9 in January but remains at a high level.

The strong Eastern European PMI numbers defy the trends seen elsewhere in Europe. The PMI for the euro area dropped to 51.2 from 52.3 in January, German PMI decreased to 50.5 from 52.3 in January, while the UK PMI dropped to 50.8 – a 34-month low.

What is the explanation for the strong PMI numbers? Well, first of all, the economies are experiencing strong domestic growth. The Q4 GDP numbers were strong in all three countries with growth rates y/y of 3.2% in Hungary, 3.9% in Poland and 3.9% in the Czech Republic. Today’s Polish PMI number, the strongest since the new government came into power, also seems to indicate that Polish businesses do not seem overly concerned about domestic policy uncertainty.

Given the exposure of Eastern European exporters, weakening growth in western Europe and a weaker euro may have a negative impact in coming months. Western Europe remains by far the most important export market for the three Eastern European economies, receiving more than half of their exports.

Hence, Eastern European exporters have probably benefited from the relatively strong euro since late November. However, in recent weeks, the effective euro has weakened as the markets have started to price in more aggressive monetary policy action. The euro may weaken even further if the ECB loosens monetary policies and the euro weakens. A significantly weaker euro could weigh on the competitiveness of CEE exporters, feeding into weaker PMIs in the coming months.

The CEE currencies are trading stronger today, continuing the strong path since January. The zloty has strengthened by 3.5% against the euro since the political turmoil in mid-January. The HUF has also strengthened by 4.30% against the euro over that period.The CZK is trading close to the floor.

Will the CEE currencies continue to trade strongly going forward? They may well if the strong economic growth continues in these economies. In the case of the zloty, we remain cautious, however, about the possible flaring up of the conflict between the EU and Poland over the constitutional court issue in Poland.


Key Drivers:

Three main drivers will rule the investors’ sentiment in coming days. Friday’s report on U.S. nonfarm payrolls will giveinvestors further insight into the health of the economy and the likelihood of further interest-rate hikes by the FederalReserve. Fed funds futures are pricing a less than 10 % chance of a rate hike during the Fed’s next meeting on March, 16.
The probability of a hike by June is 35%, up from 24% a week ago. The second driver is the National People’s Congress
where the Chinaese leaders will set the annual growth target for this year and provide a draft of a five-year plan. The
final key factor is oil dynamics. As reported, key OPEC members intend to meet with other producers in Russia on
March, 20 to renew talks on the agreement to freeze output



Current “risk-on” market sentiment will neutralize the possible pressure on the Turkish lira if the government decides to increases the sovereign foreign currency reserves. The news is neutral for the Turkish bond market.


Malaysian January trade data indicate a weak external demand on commodity exports. However, it is offset by increase in sales of manufacturing goods.

Downgrade of BHP Billiton ratings by Moody’s is backward-looking. There is a possibility of BHP bonds correction after a recent rally, though we don’t expect the Moody’s decision to be a significant catalyst.


• Accelerating pressure on Eduardo Cunha is positive for the current government as the Congress president was the main reform opponent .

• The political crisis in Brazil continues to escalate as IstoE reported Rousseff illegally protected her political allies that are under investigation under corruption case.


• We don’t expect any substantial pressure on the Mexico’s national currency after Central Bank’s comments as currently risk-on sentiment is prevailing: Mexico’s Central Bank reduced its 2016 growth forecasts as declining industry activities in the US negatively influence demand on Mexican goods. According to the latest forecasts, GDP will increase 2-3% this year, while previously its was expected to grow 2.5-3.5%. Additionally, the central bank announced the policy makers’ interventions to bolster the national currency will be rare. This statement slightly pressured MXN. At the same time, we expect the Mexican currency to grow due to the current risk-on sentiment.

EM Market Data

EM Data


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