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Czech Watch – 6 June 2001

6.6.2001 9:30

- Freedom Union (FU) deputy chairwoman Hana Marvanova declared that she would run for the top post in her party at its national conference on June 23-24. Another deputy chairman, Vladimir Mlynar, announced his candidacy some time ago. FU deputy and former minister Ivan Pilip said he would not seek the post. The current FU chairman, Karel Kühnl, has recently been elected a joint leader and shadow premier of the Quad-Coalition (4K), which prevents him from defending his position in FU. At a FU meeting in Prague, Marvanova defended the party’s membership in the 4K and added that she would not like the four parties to merge (she shares the view with the recently elected KDU-CSL leader, Cyril Svoboda). Marvanova also remarked that the 4K shadow government is to be reconstructed during the summer holiday. According to preliminary estimates, Marvanova has a great chance of being elected FU chairwoman.

- In 2001Q1, the Czech balance of payments (BoP) showed a current account (C/A) deficit of CZK 26.7bn, or a more than doubled gap compared to CZK 12.15bn in 2000Q1. The main factor behind the deterioration was the widening foreign trade gap, which reached CZK 30.13bn in Q1, against CZK 18.02bn a year ago. The surplus for services reached CZK 8bn and does not differ much from the previous year's figure. The balance on incomes recorded a year-on-year widening of the deficit to CZK 7bn. Unrequited transfers showed a surplus of CZK 2.5bn, slightly lower than a year earlier. The capital account ended almost balanced. The financial account (F/A) surplus fell to CZK 29.6bn from CZK 35.53bn a year ago. Foreign direct investments recorded a net inflow of CZK 34.5bn coming chiefly from acquisitions or equity increases in already existing businesses. The development of business services, finance and insurance, as well as the purchase of real estate were the favorite FDI targets in the Czech Republic. 35 % of the investment went into manufacturing. Portfolio investment showed a net inflow of CZK 9.5bn following an outflow of capital abroad in the same period a year earlier. Other investment saw an outflow of funds abroad of CZK 14.6bn in the form of an increase in foreign assets, as commercial banks increased their short-term deposits with foreign banks and provided medium- and long-term credits to non-residents.

- Goldman Sachs expects that after evaluating the binding bids and their specifications, a result from the tender for a majority stake in Komercni banka (KB) could be handed over to the government by the end of June. Societe Generale and Unicredito are reportedly offering CZK 35-38bn for a 60 % state stake. KB, with assets of CZK 402bn, is the country's third largest bank.

- The Czech central bank is watching the crown, currently testing all-time highs against the euro, but is not targeting any specific exchange rate level, CNB Governor Zdenek Tuma said on Tuesday. Tuma also reiterated last week’s comments by Vice-Governor Oldrich Dedek who said that monetary risks were beginning to shift to the upside. The comments were in line with recent central bankers' statements lacking explicit threats of a central bank intervention against CZK. Tuma added that unlike in 1997, there are no boundaries now that prevent crown movement and there is no significant presence of hot money. "In the current situation, there is much wider room for a market correction of the exchange rate”, Tuma remarked. CZK has been firm due to EUR weakness to the USD and strong foreign direct investment inflows.

- The Czech crown tested new all-time highs against the euro during the Tuesday’s session despite slightly worse than expected Q1 C/A data. Late on Tuesday, CZK was trading at 34.03/06, down from 33.96/99 a day ago. CZK/USD was at 40.03/05, slightly up from 40.08/10 late on Monday.

- Bond prices moved downward on Tuesday. The bearish sentiment was fueled by unfavorable C/A results. The market responded by sell-off of the longest state benchmark CZ 6,95/16, the price of which fell up to 80bps against the opening level. In the afternoon, the longest state bonds partly recovered. State 6.75/05 lost 27bps to 101.28/58, yielding 6.80/77 %. State 6.75/05 added 5bps to 103.45/75, yielding 5.68/59 %.

Late on June 5 bond yield Late on June 4
State 6.75/05103.45/755.68/59103.40/70
State 6.95/16101.28/586.80/77101.55/85

(Martin Kupka)

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