WEEKLY COMMENT MM PRIME TFI S.A. - SEPTEMBER 8, 2014
While situation in Ukraine caused depreciation of indices in the last week of holidays, unconfirmed reports of peace talks in the first week of September brought euphoria to the stock markets in Kiev and Moscow. The Warsaw Stock Exchange, especially the largest companies, were one of the beneficiaries. The WIG 20 index surged by 5.15%, reaching the highest level in the year 2550 pts. Wider WIG30 index gained 4.9%, and the medium company WIG50 rose by 4.8%. Liquidity seeking capital understandably skipped small caps, which WIG250 index increased only by 1.7%. However they were few small members of the index, like KSG Agro, that rallies to incredible levels. Valuation of the Ukrainian agricultural producer increased by a massive 220%. It is however one of those companies that can be listed among highly speculative. Major European indices didn’t perform that well, mainly due to poor service sector PMI readings. The DAX rose by 2.9%, the CAC40 2.4%, and the lowest, FTSE250 increase by only 0.2%. A similar increase was noted on the S&P500 index. It was enough to set a new historical record at 2011.17 points.
In long-term real action of the ECB, that completely surprised markets, can now support the euro zone indices. To face the risk of slower growth and greater decline in inflation the ECB decided to cut interest rates by 10 bps., deposit to -0.2% and refinancing up to 0.05% and also announce the purchase program for ABS-s and covered bonds. That somehow can alleviate market fears before tightening monetary policy by the Fed. In the USA, the engine for indices growth should be further strong economy.
As there are virtually no significant macroeconomic data this week, market should still "live" with the decision of the ECB. The WSE may experience further phase of the bull market as truce in Ukraine was signed on Friday. Markets will watch if its provisions will be respected by the separatists. As this is the step in the division of Ukraine it is not a foregone conclusion that the conflict is over. On the other hand, very important pigeon message after the September MPC meeting should support bull market. If only macro data confirm slowdown in September, rate cut or a series of rate cuts certainly occur. Morgan Stanley predicts that there may be three more reduction of 25 basis points this year. Environment of low interest rates is the most conducive to investing in stocks, and valuation of companies on the WSE are still low. It is worth to focusing on pro-cyclical sectors, such as construction, developers or furniture.
Graph 1. WIG20 daily. Source: Stooq
Last week, out of five session days, the WIG20 finished in positive territory four times. Index rose by 5.15%, breaking quite strongly a group of resistances near 2500 pts. Reaching the highest level this year. The attack on the level of 2600 pts is possible. Alarmingly, there was no increase in activity on the turnover. Massive demand for shares is not yet seen on current index levels. In the next few days correction move is possible. Despite this we think that the WIG20 will remain above the level of 2500 points, building a base for an attack on the tops, last seen in November 2013.
Graph 2. CCC daily. Source: Stooq
Last week, the CCC reported a fourth consecutive weekly increase in price, but this time it was very clear. The company gained 8.3%, confirming the earlier breakout from the short-term downtrend. In addition, we have a strong break of the resistance at 121.6 PLN (now the closest support) and an increase in volume, which is a model situation of upward move construction. Aside from possible technical correction, a matter of weeks should be an attack towards the 140 PLN. Until then CCC is still in a broad consolidation between 100 and 141 PLN and only breaking the upper limit will open a new chapter for bulls.
Authors: MM Prime TFI S.A. Investment Management Team
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