Eastern European Asset Rally Grinds to Halt as Trump's Ukraine Rhetoric Turns Sour

Eastern European assets have experienced a reversal in their bullish trend following President Donald Trump's harsh criticism of the Ukrainian government, undermining bets on a smooth peace process.

Ukraine's Currency and Stocks Tumble

Trump's denunciation of Ukraine's president as a "dictator" and his efforts to rebuild ties with Russia have shattered expectations of a deal acceptable to Ukraine. This has triggered a sell-off in Eastern European currencies, including the Hungarian forint, which suffered its largest decline against the euro since January. Ukrainian companies listed in Warsaw have also seen a sharp downturn, with an index of such companies losing 15% over the past two days after surging 83% year-to-date.

Market Sentiment Dampened

"The rally was substantial, indicating the market's optimism for a peace deal that politicians lack," said Lutz Roehmeyer, Chief Investment Officer at Capitulum Asset Management GmbH. However, the escalating tensions between Washington and Kyiv have signaled that regional security concerns may persist even if the fighting subsides.

Impact on Eastern European Bonds

Ukraine's dollar bonds, which had been enjoying a weeks-long rally, have become laggards in emerging markets. According to a Bloomberg index, they still outperform the EM average by a factor of four but have reversed their double-digit gains this year.

Geopolitical Risks Remain

Despite the close economic ties between Eastern European economies and the eurozone, the region's assets have been affected by the ongoing conflict between Ukraine and Russia. A peace plan that excludes international security guarantees for Ukraine and strengthens relations between Washington and Moscow could increase instability over the long term.

Some Exceptions

Despite the overall downturn, certain niches have benefited from direct links to Trump's entourage. Shares of Hungarian telecommunications company 4iG Nyrt. jumped 34% in two days amid speculation of a potential business deal with Elon Musk's SpaceX.

Conflict Continues in Ukraine

On the ground, fighting in Ukraine remains ongoing, with Russian air strikes targeting the country's gas infrastructure. "Trump's push for peace is a concern as it may leave Ukraine vulnerable if Russia's regional influence remains strong," said Max Wolman, an investment director at abrdn in London. "This raises questions about the sustainability of any peace deal."