Trump Slams Brakes on East European Rally With Ukraine Criticism

(Bloomberg) -- The rally in eastern European assets is coming to a halt as President Donald Trump’s attack on the Ukrainian government unravels bets on a smooth peace process.

Trump denounced Ukraine’s president as a “dictator” while rebuilding US ties with Russia, shattering any expectations of a deal that Ukraine can easily accept. The comments contributed to a selloff in the currencies in the European Union’s east, which had been on a tear until this week. Revved-up stocks also saw a sharp turnaround. 

“The rally was huge, which clearly shows that the market is more optimistic on an peace deal than politicians,” said Lutz Roehmeyer, chief investment officer at Capitulum Asset Management GmbH.

While eastern European assets have long been a proxy play on a beneficial outcome of Trump’s peace talks over Ukraine, this week’s increasingly bitter row between Washington and Kyiv signals that the region’s security concerns may not diminish even if the fighting halts.

An index of Ukrainian companies listed in Warsaw had surged a staggering 83% year-to-date through Tuesday, only to drop 11% over the last two days. Ukraine’s dollar bonds broke a weeks-long rally to become emerging-market laggards, and the Hungarian forint had its biggest decline against the euro Wednesday since the start of January.

“For now the rally is done and the market is pricing in most of the positives,” ING Bank strategist Frantisek Taborsky said. “Any surprise will come rather on the negative side from these levels.” 

CEE currencies recovered slightly against the euro on Thursday after sharp falls during the previous session. Meanwhile stocks fell further across the region and the slide in Ukraine’s international debt remained especially steep.

Part of the CEE rally was driven by a decline in natural gas prices, a crucial import, said Magdalena Polan, head of EM Macro Research at PGIM Fixed Income. “A lasting decline in gas prices is contingent on including a gas-flows agreement in any ceasefire or peace agreement,” Polan said.

Ruble Gains

Just days ago, Bank of America upgraded its recommendation for Hungarian sovereign eurobonds, saying the country will be affected positively if the geopolitical situation improves, partly via cheaper gas. 

Ukraine’s dollar bonds returned 60% in 2024 and were already in double-digit territory this year until this week’s reversal. They are still returning four times more than the EM average, according to a Bloomberg index tracking sovereign debt.

While the European Union’s eastern economies are far more closely linked to the euro region than Ukraine, the region’s assets have suffered since the Kremlin’s full-scale invasion started three years ago. A peace plan that would leave Ukraine without international security guarantees, as well as closer relations between Washington and Moscow, could make the region more unstable over the longer-term. 

Some investors had already warned in January that eastern Europe’s political and economic risks were too high to justify buying its bonds at the prevailing yields.

Any direct links to Trump’s entourage though are still helping to produce positive returns in some niches even in this environment. Shares in Hungary’s 4iG Nyrt. jumped as much as 35% in two days to a record high on bets the telecommunications company could be preparing a business deal with Elon Musk’s SpaceX.

Slovakia, which has rejected military aid to Ukraine and pledged to restore relations with Russia, also attracted record demand from investors for a single tranche bond sale on Wednesday, despite concerns over political turbulence and the nation’s public finances. Trump’s overtures toward Russia have also made the ruble a star performer.

On the ground in Ukraine, the fighting is showing no sign of ending yet. Russian air strikes hit the nation’s gas infrastructure overnight, the authorities in Kyiv said Thursday.

“The concern is that Trump is pushing for peace but the medium term picture might still be negative for Ukraine if the Russian sphere of influence in the region remains strong,” said Max Wolman, an investment director at abrdn in London. “The comments from Trump aren’t particularly supportive for Ukraine which brings into question how long a peace could really last.”

(Updates throughout with latest price changes and comments from PGIM.)

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