Fast growth will support Central European asset prices

Subject

The muted impact on Central Europe’s financial markets of this month’s sharp declines in asset prices in Russia and Turkey.

Significance

Much harsher US sanctions on Russia, together with Turkey’s continued loss of policy credibility, have led Russian and Turkish stocks to plunge by nearly 12.0% and 7.5%, respectively, in dollar terms since the start of April. This contrasts with rises in Polish (5.5%), Czech (3.3%) and Hungarian (2.0%) equities, and a slight decline for the MSCI Emerging Markets (EM) index. Central Europe’s vulnerability is rather to the recent slowdown in growth in the euro-area; the ECB’s ultra-loose monetary policies are providing support to the region’s bond markets.

Impacts

• The VIX Index ‘fear gauge’ is back below its long-term average and is at its lowest level since the outbreak of volatility in late January.
• The latest reading from Germany’s ZEW Index shows a majority of investors now expecting the country’s economic prospects to deteriorate.
• Turkey’s high-yielding local bond market has managed to attract nearly 900 million dollars of foreign inflows so far this year.