Analysis-Polish markets at crossroads on rocky road to election

investing.com:

By Karin Strohecker and Marc Jones

LONDON (Reuters) — An unpredictable race in Poland's high-stakes election has left markets in Europe's largest emerging economy in limbo.

Pre-election polls point to a win on Sunday for the ruling nationalist Law and Justice party (PiS), but one that sees it fall short of an outright majority.

That might lead to fragile coalitions or potentially even a political vacuum, which could augur more pain for the zloty, a domestic bond sell-off and pressure on Polish stocks, which have all had a mixed year so far.

«It is the most important election we have this year in Europe,» said Viktor Szabo, portfolio manager at asset manager abrdn, adding markets had not priced in scenarios such as a hung parliament or the possibility of an early election.

«If we get months of stalemate that would not be good for Polish assets at all,» Szabo added

Future ties with the European Union, the outlook for monetary policy and domestic borrowing as well as spending plans are all high on investors' watchlists.

Foreign investors have pulled $2.3 billion from domestic government bonds and in July held less than 15% of outstanding bonds, the lowest level in well over a decade and below the historic average of 20%, JPMorgan calculations show.

Both PiS and its mainstream rivals are promising even more generous spending, possibly creating more inflationary pressures against a backdrop of a rate cutting central bank.

EU TIES

The dominant concern among investors is the outlook for relations with the EU after PiS spent most of its eight years in power at loggerheads with Brussels over rule of law issues.

«In the event of a PiS coalition win, it is likely to mean a continuation of both current economic policy and a