Seven days of disappointments but prices remain strong in the markets

OTP, the largest bank, reported lower than expected figures in its financial statements for the fourth quarter of 2006.
The most significant problem for the local bank is the weakening net interest margin due to increasing competition (Raiffeisen, Erste Bank etc).
Another issue is costly funding due to its expansionist strategy, which consists of acquiring smaller banks from other countries in the region.
OTP hurt
This year, OTP will also be hurt by the austerity measures implemented by the government.
MOL, the oil and gas refining company, was mostly hurt by the strong forint, which eroded profits, as well as the weakening of the US dollar.
In addition, the drop in gasoline and diesel crack spreads (the margin a refinery can earn by cracking a barrel of oil into refined products) in the fourth quarter also had negative effects.
Magyar Telekom, the largest teleco in terms of market share in Hungary, suffered as its net profit missed market expectations.
Richter and Egis, the largest pharmaceutical companies, reported unsatisfactory numbers too; net profit was deeply hurt because of lower domestic earnings due to the new healthcare regulations.
The strong forint has also dented export sales. There are numerous uncertainties for drug producers for 2007, which could prove to be a more difficult year than 2006, after the implementation of healthcare system reforms in both Hungary and Russia.
It is hard to predict the future development of the Hungarian stock prices because they are primarily driven by the performance of the US markets.
The effects of the bullish sentiment or optimism in Wall Street is reflected in the rest of the global markets, since international investors feel upbeat and the appetite for emerging market assets increases, even if the fundamentals of the companies do not look so cheerful.
Significant
Last Wednesday and Thursday were very significant days for the market. Ben S Bernanke, Chairman of the Federal Reserve (Fed), gave an upbeat picture of the economy and suggested he is in no hurry to either raise or lower interest rates, as inflation is likely to slow on lower energy and commodity prices.
Even the most skeptical found relief in the idea that the Fed would not raise interest rates in the short-term, therefore causing a rally in stocks as last week we saw another historical high for the Dow Jones.
Investors like lower rates since they lower business costs, boost corporate profits and consequently stock prices.
Hungarian stocks received Bernanke's words with open arms and the Budapest Stock Exchange index was fueled with buying pressure on optimism for emerging assets.

Optimism in emerging

The decision triggered a rally in US stocks and bonds, which helped other international markets as investors concluded the central bank will keep rates unchanged for the short-term.
The perception is that economic growth is accelerating without generating faster inflation.
Another very positive event was the release of GDP figures, which increased at a faster-than-forecasted annual pace of 3.5% for the last quarter of 2006.
The economists expected only 3% gains, so everyone was surprised. The environment was propelled by declining gasoline prices that helped increase consumer spending and contain inflation.
The decision on interest rates allowed emerging markets, such as Hungary, to enjoy an unchanged yield advantage over developed markets.
The Budapest Stock Index (BUX) rose by 387 points or 1.63% for the week. In order to understand the main factor driving emerging markets such as Hungary, we must first understand the relationship between it and interest rates in the US.
Investors are hungry for risky, emerging markets stocks when the economic outlook in the US is looking "shiny", which implies the Fed would leave or decrease interest rates.
When interest rates increase in the US, international investors sell off their more risky stocks and bonds in emerging markets (causing the BUX to lower) and buy into safer assets and higher yielding US bonds.
In terms of the local financial environment, for the next few weeks investors will be paying attention to the fourth quarter earnings published by Hungarian publicly traded firms.
If they bring any surprises, which translate to unexpected earnings figures, the stock will come under buying (price goes up) or selling (price falls) pressure.
We should also focus our attention on perceived political instability, which might been seen if there are more political riots, such as those last week outside Parliament, and could negatively affect the Hungarian bourse.
Investors might show a little more caution, and volume could be low, if worried buyers and sellers leave the market or become inactive, waiting for any outcome from violent riots and other political acts.
It appears as if the United States was in a scenario of slightly better global growth, more contained inflation, and better financial stability.
However, downside risks in underlying financial conditions remain. Growth could slow more sharply in the US if the housing market were to weaken rapidly.
In addition, inflation could spike, possibly reflecting rising energy prices, especially oil.
We must stay vigilant to any disorderly unwinding of global imbalances which could become a threat, a slower economy in the US and possible political instabilities in Hungary, as well as disappointing last quarter earnings for the Hungarian companies that trade in the stock exchange.