13 July 2016

1.       Currency markets


Source: Datastream, ISF calculations

In the first half of this year, Romanian currency had one of the most stable developments in the region against the Euro, despite the many events of the period which had a significant impact on financial markets. Its evolution against the Euro over the whole period was similar to that of the forint, but with less volatility. These fluctuations were visible especially in the evolution of the ruble and the yen (leading to about 10% appreciation of these currencies against the Euro). Other emerging currencies issued by countries in the region experienced slight depreciation against the euro, up to 5%. The evolution of Romanian currency against the pound sterling was comparable to the forint and Czech koruna (i.e. appreciation of about 15%). 


Source: Datastream, ISF calculations

 2.       Commodities Markets


Source: Datastream, ISF calculations

Fluctuations in commodities markets were considerable during the first half of this year, with decreases in oil prices of about 25% in the first two months, followed by increases of over 30% in the second quarter, comparing with the beginning of the current year. Quotations of gold showed a predominantly upward trend with two significant periods of acceleration in February-March (amid turmoil arising from the Asian financial markets) and June (following the referendum in UK). An index of global commodities markets calculated and published daily by the Commodities Research Bureau shows an average appreciation of about 9% in the first six months of this year, on all of these markets.

3.       Sovereign bond returns


Source: Datastream, ISF calculations

Except for Greece, returns of 10-year government bonds issued by countries neighboring Romania have recorded greater fluctuations than 100 basis points (1 percentage point) over the period analyzed. In Poland is noticed a high degree of stability of these returns, while for most other countries surveyed (including Romania) the trend has been to reduce market returns. Decreasing returns can be interpreted in the context of increasing interest of investors in securities issued by emerging countries outside the euro zone which showed an improvement in macroeconomic conditions and stability of the exchange rate, given the small returns (sometimes negative) issued by developed countries such as the US, Germany or France.

The chart below shows that, from the pool of countries analyzed, 10-year bond yields in local currency issued by Romania remain highest, despite the downward trend during the last 6 months and the negative inflation which continues to occur (mainly due to the reduction of VAT).


Source: Datastream

4.       Stock exchanges

The stock indices evolution, like that of most European financial markets and international, was influenced, in the first half of 2016 by two major episodes of turbulence: one in the first months of the year due to contagion with news and adverse developments in Asian markets respectively in May and June due to BREXIT. During the first two months, all indices analyzed by us recorded significant decreases (in many cases exceeding 10 percent). Subsequently markets experienced a recovery trend which brought some regional stock markets indices in positive territory (eg. Poland, Hungary and Czech Republic, to a lesser extent). Romanian stock market indices failed to recover after the drops recorded in January-February and have not reacted significantly to the second shock manifested towards the end of the semester. Thus, the general index of the Romanian Stock Exchange, calculated by Datastream, closed the first semester of 2016 with a loss of about 10% from the level recorded at the end of 2015, which is one of the largest decreases recorded in the analyzed pool.


 Source: Datastream, ISF calculations

 In terms of liquidity of the stock markets, according to indices published by Datastream, the trend has been of worsening in the first five months of 2016 and was reversed in June when the Romanian stock market recorded a traded value, significantly higher than the same month of the precedent year. However, on the whole first semester of 2016, BVB liquidity was lower than the same period of 2015, the situation could be observed for most stock exchanges analyzed below.


Source: Datastream

The below charts present the daily conditional volatility of BET index and the transition probabilities between volatility regimes. It is noted that in the first semester of 2016, the volatility was significantly higher compared to the same period of the years 2014 and 2015. Also, it can be seen that, in both first two months of the year and in June, the index was within a medium volatility regime, while the period from March to April was characterized by a regime of low volatility.


 Source: Datastream, ISF calculations using GARCH(1,1) and Markov models

 The present research was conducted by Mr. Iulian PANAIT, PhD, member of ISF's Scientific Board.

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