Polish Markets Soar Most in Two Years as Pro-EU Bloc Set to Win

Polish stocks and the zloty rallied the most in nearly two years as a bloc of pro-European opposition parties are on track to unseat the nationalist government following Sunday’s election.

(Bloomberg) — Polish stocks and the zloty rallied the most in nearly two years as a bloc of pro-European opposition parties are on track to unseat the nationalist government following Sunday’s election. 

In what money managers described as the best scenario for markets, exit polls showed an alliance of parties planning to pull Poland back into the European mainstream with a parliamentary majority. 

Investors’ reaction was unequivocal. The benchmark WIG20 stock index rose 5.4% on Monday, with state-controlled lenders PKO Bank Polski SA and Bank Pekao SA showing double-digit gains. The zloty strengthened 1.6% against the euro, while benchmark 10-year yields dropped 18 basis points.

An exit poll and partial official results showed the three-party opposition alliance winning 249 seats in the 460-member lower house of parliament. If confirmed by final results due around midday Tuesday, the outcome is seen as beneficial for Poland’s economy and finances as the incoming alliance planned to move to quickly to unfreeze access to tens of billions of euros in EU funds held up over the current government’s rule-of-law infringements. 

Read more: Poland’s Pro-EU Opposition to End Eight Years of Populist Rule

“The suggested election outcome is being viewed as constructive by foreign investors as it will likely improve Poland’s fiscal position, political relations with Brussels, and the credibility of Poland’s institutions,” said Simon Harvey, the head of currency analysis at Monex Europe Ltd. in London. “This will likely support inflowing foreign direct investment over the medium-term.”

Some analysts, including at Goldman Sachs Group Inc. and Morgan Stanley, expect the central bank to turn more hawkish. Forward-rate agreements, derivatives used to bet on rate levels, showed traders paring bets on Polish easing over the next half year by 13 basis points. 

“We expect the central bank reaction function to now turn more hawkish as Governor Adam Glapinski’s voting record has previously been more hawkish under a Civic Platform-led government,” Goldman economist Kevin Daly wrote in a note.

Meanwhile, analysts from Erste Group Bank AG saw the strengthening of the zloty and chances of a more favorable policy toward the banking sector as opportunities, especially for state-controlled lenders. That drove stocks higher as it boosted optimism for lower inflation as well as an improvement in corporate governance standards.

The advance in the zloty and stocks on Monday is the largest since the early weeks of Russia’s invasion of Ukraine in early 2022, when east European assets fluctuated amid uncertainty over the brewing conflict. The currency is returned to levels from before September’s interest-rate cut, which blindsided investors and sent the zloty into a tailspin.

Long Path

Still, the handover of power is likely to take time. Prime Minister Mateusz Morawiecki said on Sunday night that the Law & Justice party — which is still the biggest party in parliament — is ready to discuss coalition talks with “everyone.”

Aides for President Andrzej Duda said that Polish political custom is for the head of state to nominate someone from the largest party in parliament as prime minister. The opposition said this would waste time by stalling the creation of a majority cabinet by the current opposition bloc, and may create a power vacuum at a dangerous moment with a war raging in neighboring Ukraine. Law & Justice has no path toward a majority if the exit poll is confirmed, according to the opposition.

“Investors see that the status quo in Poland has changed, which should bode well for the zloty and stocks,” said Radoslaw Cholewinski, a board member at mutual fund Skarbiec TFI in Warsaw. “This picture could change, however, if Law & Justice doesn’t concede.”

The zloty has been Europe’s best performing emerging-market currency against the euro over the past month, while Warsaw listed stocks also outperformed peers. The turnaround was partly fueled by bets that the pro-EU opposition — which combines center-right, centrist and leftist parties — could jointly win a majority. 

“The situation is going to be volatile,” said Viktor Szabo, an investment director at Abrdn in London. “It looks like the opposition has sufficient support to form a coalition, which should be positive over the medium term. However, it won’t be an easy coalition.”

–With assistance from Agnieszka Barteczko and Barbara Sladkowska.

(Recasts throughout with latest on results, market moves)

More stories like this are available on bloomberg.com

©2023 Bloomberg L.P.