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CEE MARKETS 1-Ukraine fears spread to emerging Europe assets

Sandor Peto
Thursday, 20 Feb 2014 | 5:00 AM ET

BUDAPEST, Feb 20 (Reuters) - Central European assets fell on Thursday as violence in neighbouring Ukraine cut investor appetite, raising some concern in Hungary about weak demand for the bonds on offer at an auction. Wobbles in other emerging economies have weighed on the region's assets in the past months even though most of its states are members of the European Union where economies are recovering. Their trade an financial links are much stronger with the EU than with Ukraine, but mounting unrest in the region's eastern neighbour prompted preparations in some countries, including Hungary, for a potential influx of refugees. Asset falls in Ukraine may spill over into the region as some of the key investors who are forced to sell Ukrainian bonds probably also have holdings in Central Europe. The forint, the region's most vulnerable unit due to Hungary's high debt and a decline in yields since 2012, hit a 2-year low against the euro in early trade at 314.80. Dealers said the unit fell due to worry that demand at Hungary's auction of 57 billion forints worth of government bonds would be low. The concerns were fuelled by the Ukrainian impact and a 15 basis point rate cut by Hungary's central bank on Tuesday to a 2.7 percent record low, which defied a trend of rate hikes or flat rates in emerging economies. The forint rebounded to 313.7 but it was still weaker by 0.4 percent from Wednesday, and bond prices extended losses in the secondary market, with the yield on 3-year bonds rising 13 basis points to 5.15 percent. "Ukraine is our neighbour it of course has an impact (on demand)," one fixed income trader said. Even if the auction is successful, regional assets could get only temporary relief as tension over Ukraine and other emerging economies remain, and the forint is particularly exposed to any worsening in international sentiment, dealers said. "The zloty also got significant beating in the morning... so this is a regional trend now but the forint always overreacts," one Budapest-based currency dealer said. Dealers said 315 forints to the euro could be a resistance level for some time but weakening towards record lows at 324 is the trend in the short term. "There may be a temporary firming after the auction, but the direction is for weakening," another dealer said. The region's assets fell across the board as concerns were growing over Ukraine, with all asset classes taking a hit. Poland's zloty fell a quarter of a percent against the euro, the Romanian leu 0.4 percent and the Czech crown 0.1 percent. Warsaw led a fall of equities in the region, with its main index shedding 0.75 percent. Poland's 2013 exports to Ukraine were worth $5.7 billion, or only about 1 percent of its economy and almost 3 percent of 2013 exports. Ukrainian companies have a low weight in the Warsaw stock exchange. Their index fell to a record low on Wednesday, and it has shed about a fifth since anti-government demonstrators have started occupying the central square in Kiev.

CEE MARKETS SNAPSHOT AT 1033 CET

************************** CURRENCIES ***********************

Latest Previous Daily Change bid close change in 2014 Czech crown 27.375 27.345 -0.11% -0.16% Hungarian forint 313.740 312.490 -0.40% -5.35% Polish zloty 4.178 4.168 -0.25% -0.67% Romanian leu 4.522 4.504 -0.39% -1.37% Croatian kuna 7.666 7.666 0.00% -0.62% Serbian dinar 115.870 115.820 -0.04% -1.18%

Note: daily change calculated from previous close at 1700 GMT

**************************** STOCKS **************************

Latest Previous Daily Change close change in 2014 Prague 1031.36 1038.36 -0.67% +4.50% Budapest 18232.90 18272.57 -0.22% -0.55% Warsaw 2468.01 2486.13 -0.73% +2.65% Bucharest 6417.54 6431.60 -0.22% -0.93% ***************************** BONDS ************************** Yield Yield Spread Daily (bid) change vs Bund change in Czech Republic spread 2-year 0.470 -0.010 +36bps -1bps 5-year 1.179 +0.007 +54bps +3bps 10-year 2.312 -0.001 +67bps +2bps

Hungary

3-year 5.150 +0.130 +501bps +14bps 5-year 5.420 +0.070 +479bps +9bps 10-year 6.260 +0.060 +462bps +8bps*******************

FORWARD RATE AGREEMENTS *****************

3x6 6x9 9x12 3M interbank Czech Rep 0.400 0.470 0.500 0.37 Hungary 3.200 3.640 3.950 2.73 Poland 2.740 2.810 2.970 2.71

Note: FRA quotes are for ask prices

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