October 15, 2018 / 10:10 AM / 10 months ago

CEE MARKETS-Zloty, Polish bonds firm cautiously after S&P upgrade

    * Zloty, Polish bonds firm, outperforming region
    * S&P upgrade outshines some risks, but Polish stocks drop
    * Concern over Italian budget, Brexit talks weigh on mood

    By Sandor Peto
    BUDAPEST, Oct 15 (Reuters) - The zloty firmed and Polish
government bonds outperformed Central European peers on Monday
after Standard & Poor's upgraded the country's rating to 'A-"
late on Friday.
    The last time Poland held that rating before a shock
downgrade was in January 2016, months after the current
government led by the conservative PiS party took power.
    S&P said at the time that the rating was lowered because the
government had weakened the independence of key institutions.
    Tensions with the European Union over the rule of law
including a judiciary reform have remained, thus the upgrade
caused surprise even though analysts said Poland's economic
fundamentals had deserved a better rating.
    S&P said the upgrade was justified by the Polish economy's
strong growth and better-than-projected state budget
    Polish government bond yields dropped 2-3 basis points, with
the 10-year paper trading at 3.2065 percent at 0915 GMT, while
yields elsewhere in the region mostly rose slightly or were
    The zloty touched this month's strongest levels at
4.2835 versus the euro in early trade, before retreating to
4.2938 by 0913 GMT, still firmer by 0.14 percent from Friday.
    "(The upgrade from) S&P may support the zloty at the
beginning of the week," Santander Bank Polska analysts said in a
note on Monday.
    "Nonetheless, the appreciation potential could be capped by
poor global moods," they added.
    Central European stock markets were calmer than their Asian
peers which fell amid worries over China's economy and the
U.S.-Sino trade war.
    The region's main stock indices were a touch above Friday's
close, except for Warsaw where the bluechip index fell
by 0.85 percent, near the past three months' lowest level.      
    Local European factors, which knocked the pan-European STOXX
600 index to a 22-month low, weighed on the Warsaw
bourse, Central Europe's most liquid stock exchange.
    The key concerns were Italy's government meeting which was
due to approve an increased budget deficit target for 2019 and
fears that a European Union summit this week will not result in
a much-awaited deal on Britain's exit from the bloc.

    Millions of workers from Central Europe work in Britain.
    "The S&P upgrade was good news... but Europe remains gloomy,
and a rise in U.S. Treasury yields continues to weigh on
equities," said Noemi Holecz, chief analyst of Equilor Brokerage
in Budapest.
    The euro and Central European currencies have priced in "a
lot of bad news... in connection to Brexit," said Per
Hammarlund, chief EM strategist at SEB.
    "I think there is a bigger risk on the upside than on the
downside," he added.
            CEE       SNAPSHOT   AT                         
            MARKETS             1113 CET            
                      Latest    Previous  Daily     Change
                      bid       close     change    in 2018
 Czech      <EURCZK=   25.7910   25.8090    +0.07%    -0.97%
 crown      >                                       
 Hungary    <EURHUF=  324.2000  324.4000    +0.06%    -4.10%
 forint     >                                       
 Polish     <EURPLN=    4.2939    4.2997    +0.14%    -2.74%
 zloty      >                                       
 Romanian   <EURRON=    4.6660    4.6650    -0.02%    +0.29%
 leu        >                                       
 Croatian   <EURHRK=    7.4160    7.4125    -0.05%    +0.19%
 kuna       >                                       
 Serbian    <EURRSD=  118.0900  118.2500    +0.14%    +0.35%
 dinar      >                                       
 Note:      calculated from               1800 CET          
                      Latest    Previous  Daily     Change
                                close     change    in 2018
 Prague                1082.07  1079.610    +0.23%    +0.36%
 Budapest             36393.34  36347.89    +0.13%    -7.58%
 Warsaw                2168.02   2186.62    -0.85%   -11.91%
 Bucharest             8401.52   8393.90    +0.09%    +8.35%
 Ljubljana  <.SBITOP    829.89    823.32    +0.80%    +2.92%
 Zagreb                1774.14   1772.68    +0.08%    -3.73%
 Belgrade   <.BELEX1    743.08    732.29    +1.47%    -2.20%
 Sofia                  612.41    610.40    +0.33%    -9.60%
                      Yield     Yield     Spread    Daily
                      (bid)     change    vs Bund   change
 Czech                                              spread
   2-year   <CZ2YT=R    1.6810    0.1430   +228bps    +16bps
   5-year   <CZ5YT=R    1.8880    0.0340   +204bps     +5bps
   10-year  <CZ10YT=    2.1520    0.0000   +167bps     +1bps
   2-year   <PL2YT=R    1.5670   -0.0250   +217bps     -1bps
   5-year   <PL5YT=R    2.5230   -0.0140   +268bps     +0bps
   10-year  <PL10YT=    3.2090   -0.0260   +272bps     -1bps
            FORWARD   RATE      AGREEMEN                    
                      3x6       6x9       9x12      3M
 Czech Rep                2.03      2.22      2.35      1.75
 Hungary                  0.46      0.79      1.12      0.17
 Poland                   1.78      1.81      1.86      1.72
 Note: FRA  are for ask prices                              
 (Additional reporting by Aaron Jude Saldanha in Bangalore,
editing by Ed Osmond)
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