Fisher Investments Editorial Staff
Geopolitics, US Economy

Hungary for News

By, 06/07/2010
Story Highlights:
  • Sharp negativity returned to global stocks Friday tied to two news stories.
  • In the US, employers added jobs, but not as many as estimated.
  • Earlier, the new Hungarian prime minister gave a highly confusing speech, lending itself to multiple interpretations by reporters.
  • Politicians play games in Hungary too, and this seems to be an example.

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Following two consecutive days of gains mid-week, volatility returned to global equity markets on Friday, furthering a difficult late spring for investors—an extremely frustrating period of negativity in stocks against a backdrop of overwhelmingly positive economic data. While overall vastly improving fundamentals makes 2010 radically different from 2008, that doesn't make near-term volatility any less uncomfortable.

Friday was dominated by two news stories—one from the US and the other Europe. The US unemployment report was released Friday morning, and while it showed positive growth, it missed private job growth estimates. So it was positive—just not quite positive enough. As we've covered here frequently, a better economy eventually begets better employment numbers. Today, strength in corporate profitability and worker productivity gains speak loudly to a brighter future ahead.

Prior to the release of the unemployment report, European news was already contributing to a down day. A confusingly worded speech from Hungary's new prime minister roiled currency markets against the forint, which dropped 4% versus the dollar[i], and played into latent fears surrounding PIIGS debt issues. The new center-right PM, elected May 29th, campaigned on lower taxes and re-negotiation of an October 2008 IMF/EU/World Bank loan that many Hungarians blame for exacerbating recession. Thursday, the EU blocked proposed tax cuts, saying they violated the terms of 2008's loan—which triggered Friday's strangely worded response from Hungarian officials.

Some observers said the speech was a discussion of the IMF loan history, winding its way to blaming the prior administration for inaccurate debt and deficit figures. Others said reference was to a current "grave situation" for the Hungarian economy. The speech stoked fear of Hungary becoming a second Greece—but the differences between the two are vast.

  • Hungary's economy is approximately half Greece's size and is 80% private industry versus Greece's 60%. [ii]
  • Availability remains in the already-approved IMF loan if needed.
  • Hungary refused a $1.1B IMF loan out of lack of need in March.

These factors, among others, amount to Hungary having many options available to deal with potential problems—which largely remain to be seen, pending a budget inquiry. While amendments to Hungary's debt/GDP projections seem likely today, it's doubtful they're huge, considering March's loan rejection. In the US, political games are common—and we're not so unusual. It's probably an example of Budapest pests playing politics—either laying the groundwork to reopen negotiations with the IMF, World Bank, and EU on loans or scapegoating them and the old administration for why promised tax cuts won't happen.

Perhaps Hungarian political games were lost in translation—or more likely rather ill-timed. In the midst of a correction, even relatively minor developments like new politicians in a tiny nation (with bailout funds already basically at the ready) confusing the dickens out of reporters with a clumsy speech can drive big volatility.



[i] Source: Bloomberg

[ii] Source: CIA World Factbook, www.cia.gov/library/publications/the-world-factbook/geos/hu.html

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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