Romania: Next tranches of IMF support secured
After settling the political struggle and forming the new government, Romania managed quickly to adopt 2010 budget, which was crucial for releasing next tranches for IMF and EC help package. Adopted budget envisages deficit of 4.9% of GDP, in line with IMF requirements. The government has committed itself to quite a bold restructuring of public administration: 100,000 job cuts will take place this year and public sector wages will remain unchanged. With the adoption of the budget all conditions agreed with IMF have been met and after IMF mission to Romania it was indicated that there should be no obstacles to releasing the funds. It is expected that the IMF will release both the third (€1.5bn) and the forth (€0.8bn) tranches in February, while the EC will release a tranche of €1bn in March. During the January meeting the National Bank of Romania cut the base rate by 50 bps to 7.5% despite mounting inflationary pressures. Although rate cuts in mid-term were expected, the consensus was that in January the rates would remain unchanged.

Bulgaria: On its way to eurozone?
Bulgaria has been consistent in their tight fiscal stance and registered a budget surplus for a second month in a row in November. In the eleven months through November the government ran a cumulative budget deficit of about 0.7% of GDP, which is by far the lowest in the region. Adopted 2010 budget foresees 0.7% gap, but the government is discussing to increase expenditures in order to help economic growth to pick up and the deficit could be increased to 1.7%. However, increased expenditures could be off-set by the fact that budget is constructed on -2% GDP growth, while now the government is expecting 0.3% growth, and most economists see growth in the range of 0.5 to 1%. Citing tight fiscal policy, Moody's upgraded its outlook on Bulgaria's Baa3 rating to positive (from stable) in its first positive move on an EU state since July 2008. Bulgaria will most likely apply to enter ERM-2 waiting room in coming weeks, as entering the euro zone is now the first foreign policy priority of the government. Also negotiations on entering the Schengen Area are going forward and Bulgaria expects to be ready to adopt the Schengen treaty by March 2011.

Eoin Treacy's view The Capitalization Weighted New Europe Index which consists of larger cap companies from Eastern Europe ranged below 1200 from October and posted a failed upside break in January. It has since pulled back sharply to the lower side of the five-month range, which currently coincides with the mean, defined by the 200-day moving average. Provided it finds support in the region of 1100, medium-term potential for further higher to lateral ranging will remain intact. Counter wise a sustained move below 1100 with subsequent resistance being found in that area would indicate a more persistent period of underperformance.

Comparatively large cap markets in Eastern Europe share an approximation of the New Europe Index's trend. The Czech market has ranged for longer but is also testing the mean. Poland has had a larger pullback but has also reverted to the mean. Hungary had a more emphatic failed upside break but may be finding support in the region of the lower side of the range and has al most completely reverted to the mean. Russia has a relatively similar pattern to Hungary. Turkey has been the leading market in Eastern Europe but remains overextended relative to the mean and is a candidate for a further consolidation towards the mean.

Against the background of relative weakness in larger cap markets, some of Eastern Europe's smaller markets are showing increased signs of investor interest. Romania continues to trend consistently higher; posting a succession of relatively similar sized ranges, one above another over the last six months. A sustained move below 4500 would be required to question potential for this consistent advance to continue.

Ukraine became overextended relative to the mean in October following the acceleration from 400 to 600 but it has held the majority of the advance, consolidating in close proximity to the high and would now need to sustain a move below 550 to question potential for a resumption of the medium-term uptrend in the relatively near term. Ukraine's pattern is a possible template for Estonia which has just completed a similar acceleration to Ukraine's October move.

Estonia had an explosive move in January but is somewhat overextended in the short-term and appears to be a candidate for a further consolidation. A sustained move to new highs is now required to reassert the medium-term uptrend. (Also see Monday's Comment of the Day) Latvia found support in the region of 275 in January and continues to rally back towards the September highs below 400. A downward dynamic would be required to question scope for further higher to lateral ranging. Lithuania encountered resistance last week in the region of the September high and some consolidation of recent strong gains appears likely. A sustained move to new recovery highs is needed to reaffirm the medium-term uptrend.

All Eastern European markets are not all receiving the same level of investor interest. Balkan markets in particular remain wallflowers. Bulgaria, Croatia, Serbia and Slovenia have probably all bottomed but have yet to attract sufficient demand to support a more convincing recovery. Slovakia is the clear laggard in the region and remains in a medium-term downtrend. The market was last to top out but has so far failed to bottom and while somewhat overextended in the short-term needs to sustain a move above 300 to indicate a return to demand dominance.