International Trading

Czech Republic

Three hawkish strikes from CNB Board members, but little reaction from the market

Hungary

External balance continues to improve

Poland

GDP driven by surprisingly strong domestic demand

The week ahead

The Czech Republic to unveil its issuance calendar for the last quarter of 2010

Overview

Summer season was only affected by bond bulls
An investor, who went out for a holiday in early August and, after returning, looked at the displays showing the developments in Central European forex and bond markets, might arrive at interesting conclusions. With the exception of the Czech and partly the Polish bond markets, only negligible changes occurred over the last few weeks.
Naturally, the calmer developments are due to lower liquidity on both global and regional markets, which, typically in the summer, reduces the volatility on most financial markets. As already indicated, exceptions to this were the Czech and Polish bond markets, which were very liquid, due also to the capital inflow from foreign investors. This demand drove bond prices upwards.
However, from a macroeconomic point of view, Central Europe did not see any significant events. The development of key macroeconomic fundamentals basically met expectations. An exception to this was the news on fiscal austerity under preparation by the new Czech government, which had a favourable reception with the rating agencies. That said, although the actual fiscal deterioration in the Czech Republic may not be as aggressive as it initially seemed it would be (and this may also apply to the intended restriction), this signal was enough for rating agencies to start to consider upgrading the country’s rating. The prospects for the rating upgrade may, at least partly, justify the unexpected bullish rally on the Czech bond market during the summer. Polish government bonds did ride on a similar wave. The reason was that beside solid Polish fundamentals these bonds offer very attractive yields.

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