October 19, 2018 / 9:55 AM / 8 months ago

CORRECTED-CEE MARKETS-Bond yields rise on Italy, Chinese slowdown is watched

 (In para 6, corrects to say .. 3-4 basis points ..not.. 304
basis points)
    * Bond yields rise as Italy clashes with EU over budget
    * Risks including China's economic slowdown weigh on
    * Polish retail sales lose pace, pointing to economic

    By Sandor Peto
    BUDAPEST, Oct 19 (Reuters) - Central European government
bond yields rose on Friday as  Italy's dispute with the European
Union over its increased budget deficit targets fuelled a rise
in euro zone yields.
    Italian bond yields hit four-year highs after the EU slammed
Rome's draft budget. Investors bought safe German Bunds instead
of bonds in the euro zone, with which Central European economies
are tightly integrated.
    A drop in regional equities prices also reflected risk
aversion, with worries over China's economic slowdown weighing
on nerves despite some rebound in regional currencies.
    Citi Group recommended that investors should underweight
Hungarian bonds because they are vulnerable to yield rises in
the United States and Italy.
    "For EM (emerging markets) a lot is riding on whether the
China stimulus is sufficient," Citi analysts said.
    Hungarian bond yields rose 3-4 basis points along the curve,
with 10-year papers trading at 3.8 percent.
    "This is partly Italy, and also positions are rearranged
ahead of the long week-end (due to Hungary's Oct. 23 national
holiday)," one Budapest-based fixed income trader said.
    "But Polish yields are also up, even though they do not even
have a long week-end," the trader added.
    Poland's 10-year yield rose 8 basis points to 3.28 percent,
even though the corresponding Bund yield which it often tracks
was lower by 1 basis point at 0.41 percent. 
    Polish yields rose, and along with other Central European
units, the zloty firmed slightly, tracking a mild rebound in the
MSCI emerging market currency index, even though
Poland released weaker-than-expected retail sale growth data.
    The September figures showed a drop in the annual growth
rate to 5.6 percent from 9 percent in August.
    "(That) is another disappointment this week after weaker
than expected growth of industry and somewhat disappointing
labor market data," Erste analyst Katarzyna Rzentarzewska said.
    "Such development fits into the picture of upcoming
moderation of growth confirming that economy reached the peak in
1H18," she added.
    Dovish Polish rate setter Jerzy Zyzynski was quoted by the
PAP news agency on Thursday as saying that high real interest
rates may even point towards cutting rather than increasing
Polish central bank interest rates.
    Poland will hold the first round of local elections on
Sunday, and the fight for big cities including Warsaw is a key
test to the ruling nationalist PiS party's support ahead of
European Parliament and national elections next year.
    The results of the vote are unlikely to affect markets
seriously, senior economist of Credit Agricole in Poland,
Krystian Jaworski said.
    "Unless we see a drastic discrepancy compared to the polls,
which may somehow shift the market perception regarding the
results of the parliamentary (elections)," he added.
    According to an opinion poll quoted by the tabloid Super
Express, PiS is supported by 34 percent of Poles, while its
arch-rival centrist Civic Platform (PO) acting in a coalition
with liberal Nowoczesna party had 24 percent support.
            CEE       SNAPSHOT   AT                         
            MARKETS             1028 CET            
                      Latest    Previous  Daily     Change
                      bid       close     change    in 2018
 Czech      <EURCZK=   25.8550   25.8850    +0.12%    -1.21%
 crown      >                                       
 Hungary    <EURHUF=  323.8000  323.4000    -0.12%    -3.98%
 forint     >                                       
 Polish     <EURPLN=    4.3055    4.3075    +0.05%    -3.00%
 zloty      >                                       
 Romanian   <EURRON=    4.6695    4.6705    +0.02%    +0.22%
 leu        >                                       
 Croatian   <EURHRK=    7.4200    7.4203    +0.00%    +0.14%
 kuna       >                                       
 Serbian    <EURRSD=  118.5500  118.6600    +0.09%    -0.04%
 dinar      >                                       
 Note:      calculated from               1800 CET          
                      Latest    Previous  Daily     Change
                                close     change    in 2018
 Prague                1084.19  1087.100    -0.27%    +0.56%
 Budapest             37197.61  37485.01    -0.77%    -5.54%
 Warsaw                2170.01   2188.10    -0.83%   -11.83%
 Bucharest             8582.59   8599.66    -0.20%   +10.69%
 Ljubljana  <.SBITOP    813.32    813.23    +0.01%    +0.86%
 Zagreb                1772.94   1776.23    -0.19%    -3.79%
 Belgrade   <.BELEX1    745.37    743.92    +0.19%    -1.90%
 Sofia                  607.50    608.16    -0.11%   -10.33%
                      Yield     Yield     Spread    Daily
                      (bid)     change    vs Bund   change
 Czech                                              spread
   2-year   <CZ2YT=R    1.6000    0.0490   +225bps     +5bps
   5-year   <CZ5YT=R    1.8510    0.0010   +204bps     +2bps
   10-year  <CZ10YT=    2.1620   -0.0110   +176bps     +1bps
   2-year   <PL2YT=R    1.5720    0.0080   +223bps     +1bps
   5-year   <PL5YT=R    2.5370    0.0340   +272bps     +5bps
   10-year  <PL10YT=    3.2490    0.0660   +284bps     +8bps
            FORWARD   RATE      AGREEMEN                    
                      3x6       6x9       9x12      3M
 Czech Rep                2.05      2.24      2.37      1.76
 Hungary                  0.43      0.68      1.03      0.16
 Poland                   1.77      1.81      1.88      1.72
 Note: FRA  are for ask prices                              
 (Reporting by Sandor Peto, editing by Ed Osmond)
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