CEE MARKETS 3-Ukraine fears spread to emerging Europe assets

Thu Feb 20, 2014 10:27am EST

* Hungary auction surprisingly strong despite Ukraine fear
    * Forint firms after auction, CEE currencies also rebound
    * Ukraine, emerging market concerns weigh on CEE assets

    By Sandor Peto
    BUDAPEST, Feb 20 (Reuters) - Central European assets fell on
Thursday amid fears that the turmoil in neighbouring Ukraine was
worsening and could fuel foreign capital withdrawals from
regional markets.
    The forint led the decline, hitting two-year lows to the
euro before unexpectedly strong demand at a Hungarian government
bond auction dispelled fears of an immediate sell-off.
 
    But yields continued to rise at the auction, and a sell-off
remains a risk if the Ukrainian crisis worsens or if wobbles in
other emerging markets boost risk aversion.
    "Ukraine is making the general bearish emerging-market
sentiment even more poisonous," said Adam Keszeg, analyst of
Raiffeisen in Budapest. "Markets are thin, and even the moves of
 one big investor are enough to weaken them." 
     Emerging markets in general have been hit by concerns about
slowing growth in China and by the Federal Reserve's winding
down of U.S. monetary stimulus.
    The region's eastern neighbour, Ukraine, is suffering the
bloodiest days of its 22-year post-Soviet history. Dozens of
people have been killed since Tuesday in clashes between police
and protester in its capital, Kiev.
    Central European states, once also part of the Soviet bloc,
are looking westward and they have much weaker financial and
trade links with Ukraine than with the European Union.
    But there is fear about investment contagion and waves of
refugees fleeing into neighbouring states. Some Central European
firms also have operations in Ukraine that could be disrupted.
The Ukrainian units of Poland's and Hungary's biggest banks had
to close some branches because of the fighting in Kiev. 
    A spokeswoman for the Polish paint producer Sniezka, which
has a factory in the Ukrainian city of Jaworow, near the Polish
border, said that road blocks have halted transport to and from
the factory, but production so far was normal.
    Sniezka's shares fell 2.3 percent, and Hungary's
and Poland's bourses led a decline of stocks in the region.
Budapest's main index shed 1.1 percent, and Warsaw's
index eased 0.8 percent. 
    The weakening of Central European equities was not out of
line with a decline in Western European bourses. Worries over
Ukraine also weighed on the region's currencies.
    The forint rebounded after Hungary's bond auction.
It was bid at 311.86 in late trade, off almost 1 percent from an
earlier two-year low and firmer by 0.2 percent from Wednesday.
    Other regional currencies also regained ground. Poland's
zloty and the Czech crown weakened by 0.1
percent over the day, and the Romanian leu shed 0.2
percent.
    
    CONTAGION CHANNELS
    Poland's 2013 exports to Ukraine were worth $5.7 billion, or
about 1 percent of its economy and near 3 percent of exports. 
Ukraine contributes nearly a 10th of Hungary's trade surplus,
but even without the Ukrainian contribution it would still have
a strong trade balance.
    Continued turmoil in Ukraine could mainly hit Poland, whose
zloty is the most liquid currency in the region, and Hungary,
whose markets have been the area's most vulnerable to emerging-
market contagion, because of its high debt, frequent policy
surprises and ongoing interest rate cuts.     
    Ukraine's debt market has been hit by a sell-off, and market
participants say some of its main investors were also active
elsewhere in the region mainly in Hungary.
    Robust demand at Thursday's Hungarian auction quietened
those fears for now, pushing the 3-year bond yield 
down by about 10 basis points from early lows to 5.06 percent.
    The yield was still slightly higher from Wednesday and only
a 1.5 percentage-point surge in the past four weeks shored up
the buying side for the paper, traders said.
    "Bigger hit from Ukraine is in the cards, but this is not
that yet," one Budapest-based fixed-income trader said. 
    The central bank cut rates by 15 basis points to 2.7 percent
on Tuesday, defying the rise in short-term yields and a trend of
rate hikes or flat rates in other emerging economies. Dealers
said this maintained the risk of a forint sell-off.
    "Ukraine does not help, but the main factor is that (some
investors) think after the cut and the dovish comments that
monetary policy is not credible," one dealer said. "They will 
not relax their hold - we should prepare for a weaker forint."

                      CEE MARKETS SNAPSHOT AT 1538 CET
 ************************** CURRENCIES ************************
                             Latest  Previous   Daily   Change
                             bid     close      change  in 2014
 Czech crown                 27.372    27.345   -0.10%  -0.15%
 Hungarian forint           311.860   312.490  +0.20%  -4.77%
 Polish zloty                 4.172     4.168    -0.10%  -0.52%
 Romanian leu                 4.511     4.504   -0.16%   -1.14%
 Croatian kuna                7.666     7.666    0.00%  -0.62%
 Serbian dinar              115.880   115.820    -0.05%   -1.19%
 Note: daily change calculated from previous close at 1700 GMT
 **************************** STOCKS **************************
                             Latest  Previous   Daily   Change
                                     close      change  in 2014
 Prague                      1034.29    1038.36   -0.39% +4.80%
 Budapest                  18055.64  18272.57    -1.19%   -1.52%
 Warsaw                     2470.62   2486.13    -0.62% +2.76%
 Bucharest                  6417.17   6431.60   -0.22%   -0.94%
 ***************************** BONDS **************************
                         Yield    Yield    Spread    Daily
                         (bid)    change   vs Bund   change in
 Czech Republic                                      spread
   2-year                0.801   +0.322   +67bps    +30bps
   5-year                1.179    +0.007   +49bps      -2bps
  10-year                2.312    -0.001   +62bps     -3bps
 Hungary
   3-year                5.060    +0.040   +489bps   +2bps
   5-year                5.340     -0.010   +466bps    -4bps
  10-year                6.260    -0.030    +457bps    -6bps
 Poland
   2-year                3.060   +0.010    +293bps    -2bps
   5-year                3.830    0.000    +315bps    -3bps
  10-year                4.520   0.000    +283bps    -3bps
 ******************* FORWARD RATE AGREEMENTS ******************
                              3x6     6x9    9x12  3M interbank
 Czech Rep                    0.410   0.420  0.450   0.37
 Hungary                      3.160   3.620  3.870   2.73
 Poland                       2.735   2.785  2.980   2.71
 Note: FRA quotes are for ask prices
 **************************************************************
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