Morning Note /

EMEA Daily: Busy EMEA data card to be weighed against global developments

  • EU agrees to fourth package of sanctions against Russia

  • CEE currencies kick off new week on the front foot

  • All eyes on potential Russian bond default

Danny Greeff
Danny Greeff

Financial Market Analyst

Daron Hendricks
Takudzwa Ndawona
Edmond Muzinda
ETM Analytics
15 March 2022
Published byETM Analytics

Busy EMEA data card to be weighed against global developments 

Talking Points: EU agrees to fourth package of sanctions against Russia 

South Africa: There is very little in the way of market-moving data releases and events that could trigger any optimism this week. The weekly data card consists of January retail sales numbers tomorrow, BER consumer confidence stats for Q1 on Thursday, and the potential release of Q4 unemployment data some time over the next two weeks. None of these will instil confidence that SA's economic momentum is improving significantly, with much of the recent investor optimism over SA's economic future dependent on promises of reform that have yet to materialise. Accordingly, the market will continue trading on global developments, with heightened volatility expected to remain the order of the day as commodity markets ebb and flow.   

Turkey: The data card will pick up today with central government budget balance statistics on tap. Turkey's central government budget swung from a record deficit of TRY145.7m in December to post a surplus of TRY30bn at the start of the new month. This compares with a deficit of TRY24.2bn during the corresponding period in 2021. The notable rebound can be attributed to the increase in revenue driven by a surge in tax collection, with the lion's share coming from the corporate tax collection. For February, the budget balance is likely to remain supported by the transference of the central bank's profits and reserves to the government. However, given Turkey's economic crisis, the government fiscus is likely to come under pressure further out.

Russia: The EU has agreed on a fourth package of sanctions against Russia following its invasion of Ukraine. According to reports, the package will ban sales to Russia of luxury goods worth more than €300, as well as the purchase of many Russian steel and iron products. Additionally, the package will also ban new investments in Russian energy projects. It stops short of banning the importation of Russian gas, oil, and most metals, however, as the EU looks to prevent adding to mounting inflationary pressures. Whether this package will have the desired effect of denting President Putin's popularity and forcing an end to the war remains to be seen, with many of the moves in the package carrying more symbolic weight than economic bite.

Hungary: Market closed due to a public holiday.

Poland: Investors will have the latest CPI figures to digest today. Consumer price inflation has been on an upward trajectory after accelerating for the seventh consecutive month to reach 9.2%, the fastest pace of growth in more than two decades. Price pressures are buoyed by the significant rise in energy and agricultural commodity prices, increases in regulated tariffs on electricity, natural gas and thermal energy and the ongoing economic recovery. Supply-side constraints fanned by the fallout between Russia and Ukraine are also supportive of rising inflationary pressures. However, forecasts by economists surveyed by Bloomberg are pencilling in for inflation to have slowed down for February, likely owing to some anti-inflationary measures. Despite the expected drop, Polish consumer inflation remains high compared to historical levels, suggesting that the NBP will remain on a tightening path in the coming months until inflation returns within the central bank's desirable levels.

Czech Republic: Retail activity at the start of the year, surprised to the upside, accelerating to 8.5% y/y from 2.1% y/y in December. The y/y figures remain distorted by statical base effects in the wake of the pandemic. However, as these effects abate amid the relaxed restrictions and a fairly tight labour market, we should see retail activity stabilise. Economic risks from the Russia-Ukraine fallout, persistent inflation, and a dramatic drop in the currency could see retail activity moderate in the months ahead, notwithstanding base effects.

The economic calendar has producer price inflation for February scheduled for release. Investors are in for yet another bumper inflation reading, with producer prices expected to top 20.5% y/y, thanks to the continuing rally in commodity and energy prices as well as costs related to supply chain disruptions. Authorities may need to take more preventive measures to ensure that inflation does not spiral out of control and further harm the economy. 

Forex: CEE currencies kick off new week on the front foot   

South Africa: The combination of rate-hike expectations ahead of the Fed's policy update tomorrow and reports of progress in Russia-Ukraine talks drove US Treasury yields higher and commodity prices lower at the start of the new week. This proved to be ZAR-bearish, with the local unit retreating some 0.50% to levels just north of R15.1000/$ on Monday. Recall that the ZAR weathered financial-market headwinds stemming from the Russia-Ukraine war rather impressively in recent weeks due to a broad-based market rotation away from European EMs and into commodity-exporters far removed from the war. The ZAR's decline yesterday may thus be viewed as a warning that any potential progress towards a resolution to the Russia-Ukraine conflict might not be as ZAR-positive as one might think, notwithstanding the broader improvement in risk appetite that this would lead to.

Turkey: The USD-TRY remained in consolidation below the 15.00 handle during the first trading session of the week. Intraday, the pair pulled back to 14.7843 on the back of the slightly weak dollar and the sharp decline in crude oil prices. However, the move was not sustained as buyers joined the trend to take the price higher and end the day in a very tight range. Moving forward, the consolidatory trading behaviour is likely to remain intact in the session ahead, considering the key events, namely the US FOMC (on Wednesday) and the CBRT rate decision (on Thursday).

Russia: The RUB has shown tentative signs of recovery in recent sessions, but low liquidity means the currency has been subject to severe intraday price swings and volatility. The market is pricing in some optimism over reports of progress towards a resolution to the war in Ukraine. Note that any optimism over ongoing talks between Russia and Ukraine is tentative at best, with very little in the way of material progress reported. Still, this could drive some speculative re-entry bets on RUB trades, providing support at the margin.

Hungary: Market closed due to a public holiday.

Poland: CEE currencies kicked off the new week on the front foot against the EUR on hopes that further talks due between Kyiv and Moscow might ease the situation in Ukraine. The EUR-PLN retreated by about 0.92%, snapping the consolidation seen in the last two sessions and closing the session just north of the 4.74 mark, its lowest level in two weeks. Downside pressure also came on the back of investors expecting the unblocking of the EU recovery funds for Poland, which boosted local sentiment. Yesterday's slide has not continued in the early morning session, with the EUR-PLN trading relatively flat at the time of writing. Investors appear to be erring on the side of caution as they wait for the domestic CPI print slated for later. A higher than expected print could see the cross continue its slide as it encourages the case for the central bank to tighten monetary policy aggressively.

Czech Republic: Central and Eastern European currencies rose early on in the week in the hope that further talks between Kyiv and Moscow might ease the situation in Ukraine and the rotation out the region amid a flight to safety. The CZK was 1% firmer at 24.865/EUR, trading below the 25.00/EUR handle for the first time since Feb 28. After Friday and yesterday's substantial advance and the talks offering no new information, we may see the CZK begin to show signs of weakness as it seeks direction and encounters the 61.8% Fibo retracement level at 24.793/EUR off January lows and February highs. A break above the resistance would see the CZK run into several other technical levels: the 50DMA, followed closely by the 76.4% Fibo level at 24.530/EUR. Much of the CZK's strength will depend on intervention by the CNB, which may continue for weeks or months, but not indefinitely. Today's PPI figures should support bets of a rate hike and keep the CZK supported.

Fixed Income: All eyes on potential Russian bond default 

South Africa: Consolidation in the FRA market has continued into the new week. While SAGBs have rallied in response to improving market risk appetite, the FRA market has been far more conservative. The 21x24, for instance is pricing in around 270bp worth of rates risk, down 28.5bp from recent peaks. The front end is pricing in a definite rate hike with the 1x4 sitting at 36.5bp of rate risk. Given an outlook for CPI to potentially breach 6% y/y in the next 2-3 months, this seems likely. In terms of long-end pricing, there is still reason to be sceptical as SA heads for a period of constrained growth.

Turkey: The Turkish bond market consolidated at the start of the new week, lacking any significant directional impetus as investors stuck to the sidelines ahead of this week's CBRT policy update. The broader bias for the market remains one of curve steepening, with belly and long-end tenors selling off sharply in recent weeks while the very short-end of the curve has declined. Investors will be looking to the central bank's forward guidance later this week for fresh directional inspiration, however, especially as inflation remains extremely elevated in Turkey at present.

Russia: Russia has started the payment process of its foreign-denominated bonds this week, with markets watching closely to see whether these payments will go through. The Russian finance ministry issued an order to pay the coupons, but it didn't specify if the payments would be in USD (the currency they were issued in) or RUB. The expectation is that Russia will try and pay the coupons in USD, but if the central bank's dollar account cannot be debited due to sanctions, it will pay in RUB. Whether RUB payment will be accepted is another matter, and could trigger a technical default of the bonds.    

Hungary: Market closed due to a public holiday.

Poland: The Polish yield curve shifted higher at the start of the new week as local debt remained under pressure on the back of the uncertainty over the Russia-Ukraine war, which is sapping global risk sentiment, and stagflation fears are rising. The head of state development fund PFR Pawel Borys told the media that the stagflation scenario is realistic as the cost of fighting inflation is rising as central banks hike interest rates aggressively, which in turn will cool down the economy to a bigger extent in the coming quarters. That being said, yields across the curve have surged, with a more pronounced increase evident at the short end of the curve. The 2yr tenor climbed more than 18bps to reach a multi-year high of 5.4499%. Meanwhile, the benchmark 10yr POLGB yield breached above the psychological resistance of 5.00%, to reach its highest level since June 2012.  

Czech Republic: A difficult debate awaits the CNB Board at the end of March about a possible further increase in the key interest rate. The benchmark interest rate has been 4.5% since the beginning of February, the highest since 2002. According to Czech National Bank Governor Jiri Rusnok, there is both a slight correction of the rate and a stronger impulse. "Probably not by a whole percentage point, that would be too much, such an impulse would not be justifiable. The need for higher rates is not so urgent, we are already at sufficient levels," Rusnok said. The 1x4 FRA, meanwhile, is pricing in an interest rate hike of 40bps ahead of the March meeting, which may see the board opt for a 50bps increase.