NOVEMBER 08, 2016


This week in focus: Doubling in minimal wage unlikely to threaten the economy

Both real and nominal wages are likely to resume growing, as in addition to the general economic growth there is potential for rebalancing in the economy, namely a growing share of wages in GDP structure and wages catching up with nominal GDP growth.
In our view the governments decision to double the minimum wage in 2017 should positively impact the economy. Despite the risk of straining the already controversial 2017 state budget, raising minimum wage may prompt the economy to partially move out of shadow and increase state budget revenues.


Currency market: Depreciating sentiment is likely to start taking over 

USD/UAH has been climbing throughout the week, landing at 25.56 as of November 4, up from the last weeks closing level of 25.49.
The NBU intervened into the market twice last week, purchasing USD 29.2 mn.
A technical mission of the International Monetary Fund arrived in Kyiv on November 3 to begin the third review under the EFF program.
We are re-stating our projection that markets should expect fluctuations of USD/UAH in the 25.5-26.5 band. 
EUR/USD climbed to 1.1141, up from the last Fridays level of 1.0985. The USD is weakening against its peers due to concerns over the approaching US presidential elections.


Money market: Rates decline slightly after NBUs decision 

Aggregate banking liquidity increased to UAH 83.2bn as of November the 7st, up from UAH 82.4bn on the previous Friday. The liquidity level was supported by the NBU FX purchase auctions and increasing expenditures of MinFin. 
In our view aggregate liquidity will resume gradually recovering as MinFin should be expected to keep increasing its budget expenditures, while in the short-run the liquidity is likely to oscillate above the UAH 80 bn threshold.
Money market rates declined after the last weeks key rate cut: cost of ON funds is around 12/13%, indicative 1 week is 13/14% while indicative 1M is 14.5/16.5%, according to our data.


Local debt market: Rising liquidity is yet to translate into demand for sovereigns

The last OVDP auction yielded no proceeds, as MinFin rejected the single uncompetitive bid for 5y bonds. This result illustrates that MinFin is not interested in borrowing large sums due to its excess of funds, while market participant are reluctant to accept lower yields on the primary bond market. The primary markets response to the key rate cut, carried out by the NBU on October 27, should come in gradually on the next sovereign bond auctions. 
On the next OVDP auction, scheduled for November 8, 2y bonds will be offered. As they are more liquid than the 5y bonds, the market is likely to agree on lower yields, effectively increasing demand. Meanwhile, USD-denominated OVDPs, in which investors might be more interested, will be offered by MinFin only on December 13.


Global markets: Looming US election sinks financial markets

The upcoming US presidential elections, the outcome of which will be highly uncertain, weighted down global stocks and propped up safe haven assets. The US dollar also received a beating. 
US stocks fell with the S&P 500 index lost 1.9% week-on-week. Some reassurance came from US October economic readings. Non-farm payrolls data, despite falling slightly short of expectations, demonstrated that the US labor remains strong, as the economy keeps new job creation robust. The FED left the policy rate unchanged, which was anticipated by the market, are stayed on track for a December rate hike.
The Stoxx 600 market gauge declined by 3.5% week-on-week, as European stocks followed the global sell-off.
Chinese manufacturing indicators expanded for the third month in a row readings hit a two-year high in October, as the economy seems to be on track to meet its annual growth target
Crude oil prices declined throughout the week as oil producers seem to be struggling to strike a deal to ease the glut on the market. WTI and Brent 1m futures declined by 9.5% and 8.3% respectively.

For more information: UkrSibbank_08112016.pdf