2018 was an unfavorable year for investors on global financial markets. Most asset classes recorded a negative rate of return (with Polish and German treasury bonds among the few notable exceptions). Despite the temporary trepidations at the turn of January and February, stock prices grew for the better part of the year on developed markets, having dwindled only in the last quarter of the year. The prices of US and German treasury bonds behaved erratically throughout most of the year. The yields on 10-year US Treasuries continued to increase steadily until October. Subsequently, they declined, but not deep enough to break the level at which they started the year. In 2018, the yields on 10-year German Bunds dwindled. The year began with a strong growth in the yields on German bonds, but at the end of February the upward trend reversed, and the decline even accelerated at the end of the year.
In 2018, trends on the financial markets were swayed by news of heightened tensions in global trade relations and indications of decelerating economic growth in the world’s major economies. In 2018, the US trade policy became more austere, especially towards China, which resulted in bilateral tariff hikes. This had an adverse effect on the dynamics of global trade and resulted in a worsening of the business climate in economies dependent largely on exports, including Germany. The rate of GDP growth in China and the euro area began to subside. At the end of 2018, investors also began to worry that, as a result of monetary policy tightening measures taken by the US central bank (the Fed), economic growth in this country may also decelerate. The increase in uncertainty was also worsened by the possibility of a disorderly Brexit, Italy’s pursuit to adopt a fiscal policy unacceptable by the EU and recurring declarations that customs duties will be imposed on cars exported from Europe to the United States.
However, these events did not stop the Fed from raising its interest rates four times or from continued efforts to shrink its balance sheet. In turn, at the end of 2018 the European Central Bank ended its asset purchase program, thus effectively ending the quantitative easing period.
In Poland, the stock market ended the year 2018 in the red. In 2018, the WIG and WIG20 indices lost 9.5% and 7.5%, respectively. Against the backdrop of increases in global indices and the improved economic situation in Poland, all of the country’s major stock market indices grew until the end of January. The beginning of February roughly marked a synchronized descent in all stock market indices. In the middle of the year, certain differences appeared in the paths followed by large and small cap indices. While WIG20, the blue chip index, stabilized and even improved somewhat in the second half of the year, the medium and small company indices of mWIG40 and sWIG80, respectively, continued to decline rapidly in this period. Compared to other major sectors, in 2018 the fuel industry was outstandingly strong compared to such poorly performing industries as banking, utilities, commodities and construction, among others.
WIG and WIG20 indices
2018 was another year in which Polish PLN-denominated treasury bonds appreciated. The yields declined along the whole yield curve, with the largest movement recorded on annual and 10-year bonds. The behavior of Polish 10-year treasury bonds was largely correlated with changes in the yields on 10-year German bonds. At the same time, during the year the spread between Polish and German 10-year treasury bonds tightened by 31 basis points, which resulted partly from the robust fundamentals of the Polish economy. This fact did not go unnoticed by Standard & Poor’s: the agency raised its credit rating to A- with a stable outlook. Throughout 2018, the yields on 10-year treasury bonds slumped by 49 bps from 3.30% to 2.81%. The yields on 5-year treasury bonds declined by 36 bps and stood at 2.29% at the end of the year, while the yields on 2-year bonds dropped by 37 bps to 1.34% during the year. The yield of Polish debt treasury securities with a one-year maturity fell by 56 bps, reaching 0.91% at the end of the year.
Treasury bond yields in 2018
In 2018, especially between March and May, a clear trend transpired on the main currency markets with the US dollar strengthening markedly against other major global currencies. In the light of increasing concerns about a disorderly Brexit, the British pound depreciated in the second part of the year. Eventually, the USD/EUR exchange rate stood at 1.14 at the end of 2018, which means a 4.8% appreciation compared to the beginning of the year. In the same period, the Polish zloty weakened against the major global currencies. Between the beginning and end of 2018, the US dollar appreciated against the Polish zloty by 8.0% to PLN 3.76, while the euro was worth PLN 4.30 at the end of 2018, up 3.1%. The Polish zloty clearly weakened against the Swiss franc by 7.0% (the CHF/ PLN exchange rate increased to roughly PLN 3.82).
PLN exchange rates