Commerzbank reported that improving purchasing managers’ indices (PMIs) in Poland, the Czech Republic and Hungary had pointed to a possible upturn, alongside earlier signs of recovery in Germany. It said this view has been overtaken by the Iran war and the resulting energy price shock.
The bank described the Czech PMI as the most reliable among the three, while calling the Hungarian PMI the most volatile. It noted that the Czech PMI rose more than expected in March and has been improving over recent months.
Regional PMI Momentum Fades
Commerzbank said the Polish PMI showed early moves towards reversing earlier falls and was edging closer to the 50 mark. It added that these PMI trends had aligned with Germany’s earlier improvement, raising expectations of wider regional growth.
It said the energy shock is likely to weaken real economic activity across the region and also affect Germany through higher energy costs. It added that the PMI-based outlook is now outdated unless geopolitical tensions ease soon.
The optimism from March’s improving manufacturing data now seems like a distant memory. We saw the Czech PMI climb to 48.5, and Poland’s index was moving toward the 50-point expansion mark, suggesting a recovery was starting. However, the recent energy shock tied to the conflict in Iran has completely invalidated this positive outlook.
Given this rapid shift, we should consider positioning for a downturn in the region’s currencies. Shorting the Polish zloty (PLN) and Hungarian forint (HUF) against the US dollar or Swiss franc looks attractive as a safe-haven play. This strategy reflects the historical precedent from early 2022, when regional currencies weakened sharply during the initial phase of that year’s geopolitical conflict.
Volatility And Macro Spillovers
The outlook is described as highly unpredictable, which means implied volatility on Central and Eastern European assets will likely remain elevated. We should look at buying options to profit from large price swings in either direction, such as straddles on the Polish WIG20 index futures. This allows us to capitalize on the uncertainty itself, regardless of whether the situation worsens or suddenly improves.
The surge in Brent crude, which has jumped over 30% in the last month to trade above $115 a barrel, directly threatens to reignite inflation. Central banks in Poland and the Czech Republic, which were hoping to begin easing cycles, may now be forced to hold rates higher for longer. This puts further downward pressure on economic growth and equity valuations.
We must remember that the region’s health is deeply tied to Germany, which is also highly exposed to rising energy costs. Recent data showed German industrial production was just starting to recover, but this shock will likely reverse that fragile progress. A slowing Germany means weaker demand for CEE exports, creating a powerful headwind for the entire bloc.
