October 25, 2016

This week in focus: With key reading in green, the economy confidently enters 2H

Retail sales and industrial production posted increases of 4.1% y/y and 2% y/y respectively in September. 
Solid performance of the key economic indicators underscores the robustness of the recovery and supports our year-end GDP growth projection of 1.2% y/y.

Currency market: USD/UAH at 25.65 short term prospects remain positive 

UAH resumed its appreciation with USD/UAH landing at 25.65 as of October 21, down from the last weeks closing level of 25.79.
The NBU intervened into the market twice last week, purchasing USD 95.7 mn, as UAH continued its last weeks movement, creating favorable conditions for replenishing FX reserves.
The IMF technical mission is likely to arrive in Kyiv on October 26 in order to begin negotiations over the third EFF program review.
President Poroshenko approved the appointment of two members to the Council of the NBU on his quota. With its next move the Council is expected to authorize transferring UAH 38bn of its profits to MinFin.
We are re-stating our projection that markets should expect fluctuations of USD/UAH in the 25.5-26.5 band. 
EUR/USD fell to 1.0876, the lowest level since March.

Money market: Aggregate liquidity to recover on NBU disbursements 

Aggregate banking liquidity recovered to UAH 83.5bn as of Friday the 21st. In the last week of October aggregate liquidity is likely to drop below UAH 80bn due to end-of-month tax payments, although it might be slightly offset by a FX bond placement, which is scheduled for October 25.
Liquidity is likely to recover in the mid-term as MinFin will ramp up expenditures after the NBU reallocates its profits in amount of UAH 38bn. 
On Thursday the 27th week the NBU will make a decision on whether to carry out a key rate cut. In our view, there might be a rate cut in the range of 0.0-0.5 percentage points, although it is likely that there will be no immediate impact on the yield curve.
Money market rates remained level: cost of ON funds is around 15/16%, indicative 1 week is 14.5/16.5% while indicative 1M is 15/17%, according to our data.

Local debt market: OVDP auctions are likely to limited till year-end

Sovereign bond auctions are likely to be limited at least till year-end, since the expected transfer of the NBU profits should almost saturate MinFins demand for funding. Additionally, the Ministry is likely to limit its offerings of FCY-denominated bonds since it has a substantial surplus of funds due to the recent Eurobond placement.
On the next bond action, scheduled for October 25, MinFin is planning to offer EUR-denominated bonds for the first time since 2013. Yields are likely to land at 4.5-5.0%, although the placement itself is unlikely to be large.

Global markets: Markets stable as earnings season is in full swing

Global markets posted modest gains, although volatility on the market was insignificant despite the earning season being in full swing. 
Safe haven assets also mostly slightly increased throughout the week. 
Saudi Arabia placed USD 17.5bn of sovereign bonds, which is a new record for placing international bonds by a non-developed country. 
US stocks posted meager gains week-on-week, in spite of the earnings season being in full swing.
Better-than-expected earnings also slightly propped up European stocks, with the Stoxx600 index increasing by 1% throughout the week.  The ECBs decision to keep the key rate and the stimulus package intact had a major impact on the FX market. The Euro plunged to a seven-month low against the USD after Mario Draghi had dismissed the probability of an abrupt end to the QE program.
Latest Chinese data reassured investors, somewhat easing concerns regarding the economys hard landing. Readings show that the economy grew by 6.7% y/y in Q3 2016, matching GDP growth in 1Q and 2Q. 
Crude oil stayed relatively flat during the week, with WTI 1m futures climbing 1% week-on-week to USD 50.85 per barrel, whereas Brent 1m futures slightly slid by 0.3%, closing at USD 51.78 per barrel on Friday.

For more information: UkrSibbank_25102016.pdf