EMEA Daily Update

Hungary (=)

- Hungary witnessed a sharply steeper yield curve at AKK's primary auction yesterday: AKK sold HUF 58.5bn worth of 3yr, 5yr and 15yr govt bonds, which enjoyed strong demand of course, so that AKK sold 1.3x planned volume, but at far higher yields at the long-end than at the previous auction. Yields on the 3yr bond actually declined slightly, but the longer durations saw noticeably higher yields (5yr up from 2.9% to 3.1%; 15yr up from 3.6% to 4.2%). We are witnessing this steepening in most CEE countries at this time, in sync with the trend in DM.

Poland (=)

- A big shift in ratings in the latest Millward Brown survey: support for opposition PiS jumped by 5pps to 30%, while PO recorded a low 19%, behind newcomer Pawel Kukiz’s 24%. In short, the adverse development for PO continues, although it is not clear that these latest moves have anything to do with the tapes scandal.

South Africa(-)

- Civil Servants’ Unions have withdrawn from a 3-yr pay deal, following a decision by the government to hand out a 6.4% pay increase, which is lower than the agreed 7% (lower inflation being the justification). Not very good timing just on the day S&P plans to release its review (recall that South Africa, together with Brazil are at BBB- from S&P).

Turkey (=)

- Pres Erdogan spoke up yesterday for the first time since the election: he urged all political parties to accept the election result, leave their egos aside, and cooperate to form a govt as soon as this is possible once results have been made official; Pres Erdogan emphasised that a political framework needs to be established quickly in the interests of fixed investment activity in the economy and 2023 economic targets. Within this general statement Erdogan mentioned that he will play the role given to him by the Constitution to get the process moving: this was taken positively by the markets, immediately, as a signal that Erdogan may be prepared to remain within normal Constitutional limits, which would help AKP find coalition partners (as reflected in this morning’s comments from MHP leader Bahceli that he wants to see a “normalized” AKP before coalition tlks can start). Independently, PM Davutoglu remarked that the election outcome showed that the people did not want a presidential system and this is now not on the agenda -- a significant statement in our view, which helped the lira recover through the day.

- Turkey's Apr CA deficit narrowed by 30.8% y/y to $3.4bn; the reading compares with a cumulative YTD narrowing of 13.4% y/y. The narrowing was driven by 40.3% y/y decline in the merchandise trade gap, which markets had known about since the earlier release of trade data -- a sizeable net surplus in gold had driven the trade balance to much better-than-expected in Apr. More recently we have learned that May will feature a major reversal in the trade balance because of extensive car industry strikes -- the trade deficit will be only c.8%y/y better in May vs. the 40% of Apr. In other words, the bad data point will be May, not Apr; but, this is besides the point -- the swing between Apr and May will be driven by different one-offs in each month, while the underlying trade balance shows an improving overall trend. In Apr, the services balance also declined by 0.7% y/y, while debt-inflows amounted to $2.9bn, and constituted the main source of finance for the CAD. Portfolio inflow was larger in Apr but because of the EUR 1.5bn Eurobond issue. In summary: improving CAD trend as the oil price is still helpful, but the financing picture throws up fragility which will come into focus as the Fed moves closer to tightening; we remain cautious on the lira.