Subject
CEE markets' resilience to China-induced sell-off.
Significance
While investor sentiment towards emerging markets (EMs) has deteriorated further because of mounting concerns about China's economy and financial markets, the currencies and government bonds of the main Central-East European (CEE) economies have proved remarkably resilient. Even equity markets, which have suffered sharp falls across the EM asset class, have fared better than in other regions, with Polish, Hungarian and Czech stocks falling by 5.0-6.0% in dollar terms in August, compared with 10.0% and 9.5% for emerging Asian and Latin American shares, respectively. CEE markets' resilience stems from the region's negligible trade and financial linkages to China, relatively strong fundamentals and the sentiment-boosting effects of the ECB's programme of quantitative easing (QE).
Impacts
EMs' significantly stronger fundamentals make comparisons between the current China-led sell-off and earlier crises in the 1990s misleading.
There will continue to be a strong correlation between CEE financial markets and price action in the euro-area.
The ECB's full-blown QE should help mitigate the adverse effects of a rise in US interest rates.
Very high foreign participation in Polish and Hungarian government debt poses a risk should sentiment towards EMs deteriorate more sharply.