Tomorrow, the MinFin plans to issue a two-year euro-denominated zero-bond in a total maximum volume of EUR200m under Czech law via the primary-market dealers (not a eurobond in the classical sense). This is a new way to secure FX liquidity for the government's borrowing needs introduced this year. The MinFin thus covers its FX exposure resulting from the maturity of eurobonds last year.

Issuance activity: Tomorrow, the MinFin plans to issue a two-year euro-denominated zero-bond in a total maximum volume of EUR200m under Czech law via the primary-market dealers (not a eurobond in the classical sense). This is a new way to secure FX liquidity for the government's borrowing needs introduced this year. The MinFin thus covers its FX exposure resulting from the maturity of eurobonds last year. By February, however, they had covered these needs through the money market. So far, the MinFin has issued EUR200m on the primary market and EUR335m on the secondary market through tap sales. According to the MinFin, the maximum issuance of this bond will be around EUR1bn, but up to EUR2bn may be issued under the terms of the issue. However, we assume that the actual development will correspond to the words of the MinFin, which means around EUR465m including tomorrow's auction.

Market situation: In recent months, we have seen a decline in yields and IRS, especially at the longer end of the curve due to similar movements in the US and the euro area. However, IRS are falling significantly faster than bond yields, resulting in ASW widening on the short end of the curve.

Rates outlook: On the monetary policy field, the market is currently pricing in more than one rate cut on the one-year horizon. In our view, the market is mispricing the current stance of the CNB due to negative developments abroad. However, domestic factors are rather on the upside. Growth of GDP, household consumption, retail sales and inflation are exceeding expectations. Thus, the central bank has no reason to loosen monetary policy in the foreseeable future. We expect that in the event of an improvement in the foreign environment, one additional interest rate hike might take place. Even without this step, however, market expectations of government bond yields and IRS should soon be corrected.

The first months of the year were positively influenced by global equity markets’ recovery after selloffs at the end of 2018: In December 2018, equity markets suffered from severe selloffs, which decreased the price basis and allowed for a decent rebound. This was supported by the wait for conclusion of a trade agreement between the United States and China.

Outlook for the second half of the year is not rosy: With low visibility of the outcome of the trade war and Brexit, and a recession expected in the US in mid-2020, Société Générale further reduced the risk profile of its global asset allocation portfolio. We see a downside potential to global equity indices.

The first months of the year were positively influenced by global equity markets’ recovery after selloffs at the end of 2018: In December 2018, equity markets suffered from severe selloffs, which decreased the price basis and allowed for a decent rebound. This was supported by the wait for conclusion of a trade agreement between the United States and China.

May was highlighted by another selloff:This happened primarily due to the temporary failure of trade negotiations with China. The relationship between the US and China is still quite cold. Another drop in global stock indices was caused by US President Donald Trump’s threats of imposing import tariffs on Mexican goods. June brought a solution to the Mexican tariffs so markets could rebound and cover May’s losses.

Outlook for the second half of the year is not rosy: With low visibility of the outcome of the trade war and Brexit, and a recession expected in the US in mid-2020, Société Générale further reduced the risk profile of its global asset allocation portfolio. We see a downside potential to global equity indices.

Sectoral composition: We are more directed toward defensive stocks again, with a focus on quality earnings and solid higher dividend yielders. Utility, beverages and real estate are the sectors with a new Overweight recommendation.

Prague Stock Exchange: We believe the PX index is able to surpass developments of West European competitors and achieve double-digit growth this year.