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Central and Eastern Europe stock markets found some support in early trade on August 25 after most Asian markets recovered overnight even as Chinese stocks slumped for the fourth day.
However, sentiment remains fragile after the recent big falls around the globe sparked by China’s decision to devalue the renminbi. And the three largest stock markets in the CEE region – Russia, Turkey and Poland – are all in bear territory with losses of more than 20% from their peaks, joining 15 of the 30 largest EM markets now officially classed as bear markets, according to Bloomberg.
By mid-morning, many CEE markets had either recovered or at least stabilised to a degree after the steep falls experienced the previous day on August 24 as panic selling in China and the rest of Asia took its toll on global stock markets.
Russia's stock market, which is down 32% from its last peak hit in May, was hit by the double whammy of the global emerging markets selloff plus falling oil prices triggering ruble depreciation. Thus the RTS index opened on August 25 down, dropping 4.9% amid high trading volumes, though had bounced back to around 3% up by midday as the oil price recovered.
Brent oil futures dropped below $43 per barrel on August 24, and consequently the ruble fell past the RUB71 to the dollar mark to hit a new all-time low. Banking stocks suffered most from the weak ruble on August 24, according to analysts at Uralsib. GDRs of VTB dropped 5.6% and Sberbank closed 5.3% lower in London.
In Belarus, the Belarusian ruble fell by 4.9% on August 24 and continued its slide the following day, influenced by the impact of the crash on Russia, the republic's chief economic partner. The slump made the Belarusian ruble the world's worst performing currency, according to Bloomberg. But Ukraine, which celebrated its Independence Day national holiday on August 24, appeared to miss the storm altogether, with no adverse effects on the hryvnia currency. The stock market also showed only a moderate reaction when trading resumed August 25, with the Ukrainian Equities Index (UX) just 0.96% lower at mid-morning Kyiv time.
In Turkey, stocks were up 1.34% in early trading on August 25, while the Turkish lira had gained some ground, trading at TRY2.9295 against the dollar versus TRY2.96 on August 24.
But Turkish assets have been mauled over the past few months by a combination of political uncertainties, geopolitical risks and the global market selloff. The main BIST 100 stock market index fell 3.3% on August 24, hitting a 52-week low, and has fallen by 6% over the past week.
The Turkish lira dropped to a record low against the dollar last week, hitting almost TRY3.00 before rebounding. The lira’s loses against the greenback have exceeded 25% this year, making it one of the worst performing emerging market currencies after Brazil’s real and Belarus' ruble. Yields on the benchmark two-year government bond rose from 10.25% on August 17 to 11.25% on August 24.
Turkey’s political risk shows little sign of abating as President Recep Tayyip Erdogan on August 24 officially called for new elections after efforts to form a working government failed. The new elections are likely to take place in November.
Bill Emmott, a former editor-in-chief of The Economist, has picked politics as the real culprit for what he calls the pricking of “the great emerging market bubble”.
“Something has gone badly wrong in the emerging economies that were supposed to be shaping, even dominating, the future of the world,” Emmott wrote in an oped published last week. “The search for culprits is under way: commodity prices, fracking, US interest rates, El Nino, China – these and others lead the field. But the answer is simpler and more traditional. It is politics… The same can be said of Turkey, where growth has sagged to 2.3% in the latest quarter – which at least beats population growth but is meager compared with the country’s go-go years of 2010 and 2011, when it expanded by 9%.”
Cristian Maggio, head of emerging-markets strategy at TD Securities in London, told the Wall Street Journal that Turkey’s “political situation is becoming a real mess”, predicting that Turkish markets will remain under pressure. “We’re clearly heading full steam into uncharted territory as we go toward elections. It is unlikely investors will accept all this uncertainty at zero cost,” he said.
The Turkish central bank's failure to respond effectively to the lira’s sharp depreciation has added to investors’ unease. Turkey's five-year credit default swaps (CDS) rose from 236 basis points (bp) on July 31 to 295bp on August 24. The central bank decided to leave its benchmark rates unchanged at its monetary policy committee meeting on August 18. “Turkey is, consequently, unlikely to regain a stable government before the end of 2015. The uncertain political landscape could weaken the policy response to both external and domestic events, including potential capital outflows," ratings agency Standard & Poor’s warned in a recent report. “Combined with geopolitical tensions on Turkey's borders and the flare-up of violence with the Kurdistan Workers' Party (PKK), these uncertainties could hamper growth through weakened confidence and delayed investment activity.”
The region’s other big stock market, Poland, was, like its Central European peers, also in positive territory in mid-morning trade August 25. While unable to dodge the carnage entirely, the markets in Central Europe saw limited damage on August 24. Slim trade links with China and a role as heavy net importers of commodities has promoted the Visegrad region as something of a safe haven in recent months. That said, all is relative: Central Europe couldn't escape the panic entirely.
Poland, a net importer of energy, with an economy driven by increasing consumption, saw the main WIG 20 index on the Warsaw Stock Exchange climb 0.4% in early trade on August 25, after falling 5.66% the previous day.
While it imports most of its oil and gas, Poland is not only a buyer of commodities. The fall on the bourse was magnified by more negative news flow about the struggling coal sector. Another major faller – over 12% – was KGHM, one of the world’s leading copper producers. However, that price fall appeared to attract buyers on August 25, with the stock up 2.2% in early trade.
The Polish zloty, which has see-sawed in recent months, also felt the impact. The currency fell 0.4% to finish the day at PLN4.26 to the euro, but early the next day had recovered to PLN4.22. Polish domestic bonds also slid on August 24, with yields on 10-year local-currency government bonds rising 16bp.
Nevertheless, Poland’s WIG 20, like its Russian and Turkish peers, remains in bear territory, being down around 21% from its previous peak hit in April of this year. According to Bloomberg, 15 of the 30 largest equity markets in emerging economies are now down by 20% or more, “with the remainder either in a correction or on the brink”.
On the brink
Elsewhere in Central Europe, Hungary was on its way back from a four-day weekend, meaning it missed the start of choppy trading on August 21. Hence, the 6.1% drop on the main BUX index on August 24 could have been worse.
The damage was reasonably limited on Hungarian debt markets also on August 24. Although yields on long maturities jumped by as much as 20bp on the secondary market, according to state debt manager AKK, yield gains on shorter term paper remained in single digits.
The volatile forint lost 0.4% to finish August 24 at HUF313.4 to the euro. Early on August 25, the currency was struggling to gain much traction, although it had recovered to HUF312.7. The Magyar Nemzeti Bank meets on August 25, and is due to leave interest rates at a record low 1.35%.
Tthe Czech Republic was quickest out of the blocks to begin righting the ship. Prague’s equity market gained 3.7% by mid-morning on August 25, after having sunk to its lowest level since the middle of January the previous day, as the PX index lost 4.6% to close at 946.34. The index is still down over 10% from its peak hit in April of this year, meaning it is classed as in a market correction phase.
With investors still testing the Czech central bank's resolve to keep the koruna capped at CZK27 to the euro, the currency lost just 0.02% on August 24 to close the day at CZK27.032. As nerves settled early the next morning, the koruna's attraction as the ultimate haven faded somewhat, and the currency dropped to CZK27.05. Yields on the 10-year Czech sovereign bond were volatile on August 24, although contained within a relatively small range, and finished the day 0.04pp higher at 0.877%.
In Southeast Europe, the region’s biggest market outside of Turkey, Romania, was still struggling early on August 25. The blue chip BET index of the Bucharest Stock Exchange (BSE) was down another 1.7% in mid-morning trade from Monday's closing. The previous day saw the index dropping by 6.3%, after it had reached even lower values during the day. It was the steepest decline the BSE has seen in years.
All other market indices – of financial investment funds, the broader indices index and of the most liquid shares – dropped by more than 6% on August 24. The local currency did better, losing only 0.25% to the euro, while strengthening by 1.57% versus the dollar.
Croatian stock indices continued to drop in the morning of August 25 after all of them ended the previous day in the red. However, the decline has eased. The CROBEX10 index of the bourse's 10 most liquid companies was down by 0.34% to 1,009.67 by early morning trade. The index had dropped 2.35% to 1,013.11 the previous day, a record low since July 8. The other important stock index, the CROBEX of 25 companies, was 0.32% down at 1,725.99. It dropped 2.92% to 1,731.51 on August 24. The ZSE's total turnover jumped to HRK30.8mn (€4.1mn) on August 24 from HRK8.4mn in the previous trading day. The biggest turnover, of HRK5.2mn, was generated by food and pharmaceuticals producer Podravka, which closed down 2.47% at HRK316.99.
The Bulgarian Stock Exchange’s blue chip index SOFIX dropped by 3.06% on August 24, but was up by 1.14% in the first hours of trading on Tuesday morning
Kazakhstan’s stock market was also stable in morning trading on August 25, with the main KASE Index flat at 837.02, as shares of KAZ Minerals and KMG EP showed strength.
Kazakh stocks also took a battering on August 24, though analysts say that was less to do with the turmoil on the Chinese stock market, than the slump in global commodity prices.
The KASE Index, composed of nine corporate stocks – three commercial banks, three resources-related companies, two telecoms and a power grid company – fell by 6.56% to 830.98 on August 24, cutting the big gains of 9.25% on August 20 made after the government announced it would allow the tenge to float freely, which pushed the currency’s value down by nearly 29% to KZT255.26 to the dollar on August 20.
The devaluation of the tenge will benefit exporters of mineral resources, as it reduces the dollar value of production costs. On August 20, the shares of copper producer KAZ Minerals surged by 22.1%, while the stocks of KazMunaiGas Exploration & Production (KMG EP) jumped by 30.7%.
The crushing of the Chinese stock market has pushed the global prices of minerals down; as a result, shares of KAZ Minerals fell by 8.5% and those of KMG EP by 13.6% on August 24. The shares of Kazakhstan’s national oil-transporting company KazTransOil also fell by 5.7% on August 24.
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