Focus of the Domestic Market on Global Events

On the Zagreb Stock Exchange today, most analysts expect stagnation of the Crobex index, with investors primarily focused on the voting of the financial industry rescue plan in the U.S. Congress.

Of the eight analysts from brokerage firms who participated in Hina’s survey, five expect stagnation of the Crobex today, while three expect a decline. The Crobex index weakened by 2.03 percent yesterday, to 2,976 points. The regular turnover of shares amounted to just over 65 million kuna. The most attention from investors on global exchanges today will be drawn to the vote in the House of Representatives of Congress on the $700 billion rescue plan for the financial industry from the crisis, assesses Dalibor Balgač, an investment advisor at Abacus brokers. “This will likely also affect sentiment on the domestic stock exchange, so I expect investors to be cautious. And due to yesterday’s significant drop in the Crobex, I expect its stagnation today,” says Balgač.

On Wall Street, stock prices fell more than 3 percent on Thursday as investors fear that the U.S. economy will enter a recession, even if Congress approves the $700 billion bank bailout plan. The latest data shows that the number of unemployment claims in the U.S. reached nearly 500,000 last week, which is considered a level that indicates a recession. In August, industrial orders fell by 4 percent, marking their largest drop since October 2006. This morning, due to fears of a recession in the U.S., the major indices on Asian exchanges also fell.

“The weekly unemployment data in the U.S. definitely indicates a recession in the U.S. If the financial industry rescue plan is adopted, it would help alleviate the global credit crisis, as lending to the industry, as well as interbank financing in the U.S., is frozen, and it is difficult in the rest of the world,” says Balgač. He notes that on the global interbank market, the one-month LIBOR has reached a high of 4.0 percent. Furthermore, the TED spread, the difference between interest rates on interbank loans and short-term U.S. Treasury bonds, is also rising sharply. The five-year average TED Spread is 0.56 percent, it was 1.10 percent a month ago, and now it is above three percent.

“This indicates significant distress among banks and a lack of confidence in long-term lending, which is now affecting the real sector,” comments Balgač. However, he believes that the recession is largely already factored into stock prices on the U.S. stock market. “This is neither the first nor the last time that the U.S. is entering a recession. If the current global credit crisis is resolved, lending to the industry will resume, and a recovery could occur in six to nine months. The stock markets will, of course, react before that,” says Balgač. The Croatian capital market has recently been following trends on global exchanges. “There is still significant nervousness in the domestic market; it is felt that investors are gradually losing confidence,” assesses Balgač.

Today, the public offering by MOL for the purchase of shares in INA, which pertains to just over 30.16 percent of the shares, is expiring. In recent days, there has been a significant response from small investors, and according to the latest data from the Central Depository Agency, as of yesterday, 358,350 INA shares were deposited with the agency. The price of INA’s shares fell by 6.42 percent yesterday, to 2,550 kuna. As Balgač assesses, the further movement of INA’s share price will largely depend on market sentiment.

And despite the fact that the credit rating agency Fitch confirmed on Thursday Zagrebačka banka’s long-term rating for borrowing in foreign currency at ‘BBB+’, short-term rating for borrowing in foreign currency at ‘F2’, outlook ‘stable’, individual rating ‘C/D’, and support rating ‘2’, the price of its shares fell by 7.1 percent yesterday, to 300 kuna.

At the same time, Fitch confirmed its long-term rating for borrowing in foreign currency at ‘A+’ for its owner, Italian UniCredit, but downgraded its individual rating to ‘B/C’, from the previous ‘B’. “It seems that in this unstable time, some investors have decided to close their positions on the Zaba stock, but the operations of Zagrebačka banka are stable, which is confirmed by Fitch’s rating,” comments Balgač.

Hina’s survey shows that continued interest from investors is expected mainly for the most liquid issues, which seem to be the safest investment on the stock exchanges in this unstable time. The Baltic Dry Index (BDI) weakened by 1.16 percent yesterday, to 2,990 points. “The main driver of the BDI’s decline is China and the misunderstanding with the Brazilian mining company Vale regarding a new increase in raw material prices, which has halted the delivery of iron ore from Brazil to Chinese ports,” explains Balgač.

However, he points to yesterday’s increase in components of the BDI index – the cape size index and the panamax index based on speculation that China and Vale will soon agree on the raw material price. Additionally, the index of orders in the Chinese industry recovered in September for the first time since June, indicating that industrial activity is waking up after the end of the Olympics and the ‘Golden Week’, and that China’s demand for shipping raw materials will also increase, concludes Balgač for Hina’s financial service.