Market summary according to AFORTI: condition of public finances, PLN waiting for the ECB and FED and escalation of tensions in the Middle East

The most important event in recent weeks in Poland is behind us, i.e. the elections to the Parliament. For the previous 2-3 weeks, the market was clearly not sure what to expect. It is true that the zloty was gradually strengthening from the monthly maximum levels - EUR/PLN 4.6250, discounting preliminary survey results, but the decline, as we predicted two weeks ago, stopped just before the elections - in the range of 4.5000-4.5200. The psychological level of 4.5000 remained too strong a support and was not broken in the pre-election week.

The situation changed right after the announcement of late-exit pools, which showed that opposition parties won the majority of votes. The market appreciated this information very enthusiastically and the zloty gained rapidly, strengthening by 8 groszy against the EUR, creating the so-called "gap" in the charts. The market on election day (no regular trading on the interbank market on Sunday) for EUR/PLN closed at 4.5300-4.5400, only to suddenly gain to EUR/PLN 4.4600. The exchange rate corrections initially reached EUR/PLN 4.5000 because importers who had been expecting lower rates for a long time started shopping. However, currency markets quickly concluded that the valuation of the native currency is currently closer to EUR 4.4200-4.4600. After the initial euphoria, we have observed that the zloty is under pressure resulting from the uncertainty regarding the creation of a stable coalition and the formation of a new government, as well as unclear messages coming from the Presidential Palace regarding who will be entrusted with the mission of creating a new government. Even though the total number of votes in the Lower House of Parliament is 248, which allows it to have a parliamentary majority, there are increasing signals that this mission will be entrusted first to PiS, which achieved the highest result in terms of the number of votes for one grouping. There is also talk of the President's consultations with the leaders of each party, but separately. This confirms that after the inauguration of the new term of Parliament, we can expect that there will be an attempt to change the balance of power and gain a majority for a month. In the opinion of financial markets, such uncertainty may cause instability and failure to implement the funds promised by the opposition to obtain funds from the KPO.

The uncertainty in the markets certainly did not help with the information that the debt of the State Treasury at the end of September increased by PLN 27.2 billion (+2.1% m/m), reaching the rather astronomical amount of PLN 1 trillion and 305 billion. Of this debt, almost PLN 300 billion is foreign debt, which is approximately 23%. Total debt. It should be emphasized that strong currency movements and a weaker zloty increase the cost of debt servicing in foreign currencies.

Another element that worries economists is the very large amounts of debt that are outside the official deficit reported in the budget. These amounts are not included in the expenditure rule, which creates a dangerous precedent of bypassing the so-called "fuses" that are supposed to guarantee that the state debt does not get out of control.

However, we can be pleased with the good readings for retail sales, which surprised us with their reading. The market consensus estimated a 2% decline in retail sales y/y. Meanwhile, demand decreased by only 0.3% (September 2023 reading). The previous August data saw a decline of 2.7% year-on-year. Growing retail sales should stimulate GDP, but relying solely on this factor, which is inflationary, should not build expectations for an acceleration in the economy in the long run. Hence, it becomes important to obtain funds from the KPO, which is to stimulate investments.

Talking about industrial production, the decline was lower than expected 3.5-3.6%, stopping at -3.1% y/y. Of course, such a decline should not be encouraging, considering that this is the ninth month in a row.

So, looking at the zloty - in our opinion, the valuation of the zloty against the EUR for the next week is 4.4450-4.4750. The zloty was consolidating, waiting for the next political news. Potentially possible, but temporary correction should not exceed 4.5000.

EUR/PLN in the last month

EUR/PLN in the perspective of the last week

The US dollar was also influenced by political messages, but in addition, the volatility of EUR/USD resulted in increased fluctuations of the USD/PLN pair. The last 20 days have seen the strengthening of the Polish zloty against the US dollar by 23 cents. The volatility of rates was most visible when the results were announced, but it was also influenced by the situation in the Middle East. Let us remember that the dollar still dominates in oil purchase contracts.

Breakdown towards 4.1700 and back to USD/PLN 4.2100. So what can we expect? Certainly, the current consolidation is, just like in the case of EUR/PLN, a waiting period. However, here we will definitely be influenced by waiting for the FED's moves and the situation in the Gaza zone. In our opinion, USD/PLN this week is in the range of 4.1800 – 4.2200

USD/PLN over the last month

USD/PLN in the perspective of the last week - with high volatility

Looking at the already mentioned EUR/USD pair - the markets are strongly influenced by the situation related to the conflict in the Middle East and the possibility of its escalation and spread to neighboring countries. As a result, oil prices are rising to almost USD 95 (Brent). Gold has returned to play as a safe asset and, after recent declines, is now approaching the level of USD 2,000/ounce.

All this has a strong impact on the perception of the situation in the US and the FED's decisions. In anticipation of potential increases, the yield on US 10-year bonds reached its highest value since 2007 - almost 5%. Jerome Powell's assurances are intended to reassure the markets that have received the announcement about the end of the rate hike cycle, but in our opinion, a move of 25 basis points may occur in December. With the rising yields of American bonds, which are already at similar levels, one should be aware that many investors active on international markets will be willing to choose securities with a better rating. Hence, we need to return to an important element, which is the creation of a majority government in Poland that will obtain KPO funds. This situation should have a positive impact on Poland's credibility and encourage investors to purchase Polish debt securities.

So what awaits us for EUR/USD? The current return to 1.0600 is quite logical considering the uncertainty related to the US involvement in Israel. On the other hand, let's watch the messages coming from the FED regarding interest rates. This may result in a move south – towards EUR/USD 1.0400.

Let's take a look at the Polish debt market, which showed interesting volatility and a steepening of the yield curve. First of all, the rising yields of 10-year bonds (from 5.59% to 5.90%) and the decline in 2-year bonds (5.36% to 5.02%) were noticeable. This is quite an interesting signal, which suggests that there are growing concerns about the level of further inflation and uncertainty about whether its decline will actually continue. This confirms that the market did not fully believe in the data suggesting a dynamic decline in inflation, to just over 8%. Let us recall that at the October meeting of the Monetary Policy Council/NBP, a decision was made to reduce it by 25 basis points, placing the reference rate at 5.75%. However, have the Central Statistical Office data behind this and inflation artificially low in fuel prices calmed down investors? As you can see, not necessarily.

Finally, it remains to look at the stock exchanges. Together with the burst of euphoria in the currency market related to the elections, the Polish stock exchange also had its 5 minutes of triumph. Banks grew the most, and increases of 10% in individual securities were not isolated. WIG20 quickly broke the 2,000 level, at one point reaching 2,140. Later, however, the enthusiasm weakened due to the previously mentioned political factors on the Polish scene, as well as investors' aversion to risk - caused by the conflict in the Middle East.

A similar thing happened at WIG. The level exceeded 71,000 points and then returned to the pre-election level - around 69,000. Therefore, we still have to wait for a more lasting change. Especially since the changes on the Polish political scene may last until December - which will certainly not encourage too much risk on the stock market.

Szymon Jańczak

Director of the Treasury Department
AFORTI Exchange S.A.