Morning Note /

EMEA Daily: EM idiosyncrasies to come back to the fore in volatile market?

  • SA inflation warrants 25bp rate-hike today

  • RUB recovers after President Putin announces gas payments to be done in RUB

  • SARB to bridge gap in rates outlook between itself and the market today

Danny Greeff
Danny Greeff

Financial Market Analyst

Takudzwa Ndawona
Edmond Muzinda
Daron Hendricks
ETM Analytics
24 March 2022
Published by

EM idiosyncrasies to come back to the fore in volatile market conditions? 

Talking Points: SA inflation warrants 25bp rate-hike today      

South Africa: Local CPI data printed slightly softer than market expectations yesterday, reflecting unchanged inflation rates of 5.7% y/y (headline) and 3.5% y/y (core) for February. Details underlying the print showed that the main contributors were food, transport, and administered prices, with this even before the Russia-Ukraine war's impact on these categories. Although the inflation numbers were only marginally softer than expected, they helped dial back expectations of runaway inflation in SA and triggered a small FRA-market correction through yesterday's session.

That being said, headline inflation remained close to the ceiling of the SARB's 3%-6% target range, and, accordingly, the professional market is still positioned for a widely-anticipated 25bp rate hike today. Perhaps more interesting than the interest-rate decision will be the accompanying forward guidance, which holds significant market-moving potential given prevailing uncertainty over the SARB's policy outlook. The central bank finds itself in a precarious position, as it weighs weak domestic growth and a record-high unemployment rate against mounting price pressures and the risk that inflation expectations detether.

Turkey: The Turkish Labour Minister Vedat Bilgin ruled out raising the minimum wages for the second time this year after a senior from the ruling Justice and Development Party (AKP) floated the idea of once more reconsidering the minimum wage. Bilgin thwarted the idea saying that the government has already made a substantial increase in the minimum wage, and the latest hike was in line with the inflation rate. However, given the rampant inflation and collapse in the lira's value, the working community has seen a continued deterioration in their real incomes. Against this backdrop, pressure for the government to offset the high cost of living remains entrenched. With elections next year, public opinion polls show a substantial erosion in support for the ruling AKP, given the country's economic crisis.

Russia: President Putin announced yesterday that Russia would seek payment in RUB for gas sales from "unfriendly" countries. With the financial noose tightening and the EU split on whether to sanction Russia's energy sector, this response from Putin could be a masterstroke as it would support demand for RUB and, in turn, support liquidity conditions and tame inflationary pressures. Whether this change would amount to a breach in international contract law, however, is a different matter.

On the data front, note that weekly CPI stats released out of Russia showed inflationary pressures eased at the margin in the week of 18 March, although there are growing signs of shortages in food staples and imported goods. The CPI grew 1.93% in the week, which was slightly lower than the 2.09% in the prior week. Looking ahead, price pressures will likely lead to domestic demand falling sharply in the coming months, which bodes ill for Russian GDP.  

Hungary: The regional data calendar is packed for today with PMI releases. Both the Eurozone manufacturing and services PMIs are expected to dip in the provisional March print as the uncertainty of the Ukraine-Russia war weighs on business activity and growth in Europe. However, both indices would still be above the 50-neutral mark, signalling expansion for now. While ECB policymakers reiterated their commitment to containing inflation at their recent policy meeting, they will now need to tackle inflation alongside the negative growth impact the war will bring. Furthermore, elevated energy prices will be driving inflationary pressure and will add to pressure on growth in the coming months. The PMIs will thus offer important insight into the economy's performance, the probable growth hit to come and the extent to which the ECB may change its tone.

Poland: Tension between Poland and Russia could escalate after Warsaw expelled 45 Russian diplomats after arresting a low-level civil servant on suspicion of providing Russians with documents that could be used to create false identities. Speaking on the matter, Foreign Ministry Spokesman Lukasz Jasin said that the diplomats, identified as officers of the Russian special services and their associates, will leave Poland in the next five days. Russia is expected to push back by expelling Polish diplomats from Moscow.

On the data front, Poland's consumer confidence fell to an all-time low in March, indicating Poles' uncertainty about current events and their financial standing in the future. Specifically, the index fell by 11.3 ppts from the previous month to -39, lower than the level recorded at the start of the global COVID-19 pandemic in 2020. The latest reading missed market expectations of a less pronounced drop to -30.5, a median estimate of analysts surveyed by Bloomberg as war-related concerns have been added to the earlier concerns over inflation. The depressed level of consumer sentiment will certainly weigh on the economic growth outlook for the near term.

Czech Republic: Deputy central bank Governor Marek Mora was reported yesterday saying that the Czech Republic will probably need to raise interest rates to "well above 5%" to rein in inflation as the war in Ukraine brings risks to economic growth in Europe. Mora went on to add that he will probably back a 50bps interest rate hike in the upcoming monetary policy decision scheduled for the end of the month and then support lifting it "as high as necessary." Given the recent view of the Governor and one other central banker, the meeting is likely to be contentious as policymakers walk a fine line of cooling domestic price pressures and avoiding stagflation risks. Therefore, the debate will likely be centred around the size of the rate hike and the effectiveness of intervening in the spot market to keep inflation and the impact of Ukraine to a minimum.

Also note that the economic calendar picks up today. Confidence in the Czech economy likely plummeted in March, providing the first glimpse at consumers' and businesses' reaction to the Ukraine war and its repercussion on energy prices. Sentiment was beginning to improve, but the war and the headwinds it brings are likely to continue in the short term. If the deterioration in sentiment continues, it could pose significant risks to economic growth this year.

Forex: RUB recovers after President Putin announces gas payments to be done in RUB     

South Africa: A hawkish rate-hike today is likely, and would go a long way in justifying the ZAR's recent resilience. The short-term risk for the ZAR is that a lot in the way of rate-hike risk is already priced in, and that the market books profits on the ZAR's strong performance of late post the SARB update. This kind of buy-the-rumour-sell-the-fact trade is always a possibility around policy meetings, and adds a layer of uncertainty heading into the weekend. However, for now, the USD-ZAR will continue testing the 14.7500 level, having run into strong support between 14.7500 and 14.8000 through yesterday's session.

Turkey: The steady performance in the USD-TRY continued on Wednesday on the back of the country's banking regulator stepping in to curb lira liquidity in the offshore market, an attempt to deter short sellers. Turkey's banking regulator warned local lenders not to provide lira liquidity to firms looking to speculate in the offshore money market. Notwithstanding the steady performance, the risk to the bias remains to the upside on the back of the stronger dollar and high UST yields due to the hawkish Fed, geopolitical tensions and the underlying idiosyncratic factors.

Russia: The RUB led EM currencies higher with a near-10.00% advance on Wednesday, closing at its strongest levels in a month after President Putin announced that Russia would begin selling its gas to "unfriendly" countries in RUB. The hope is that this move would trigger a return of liquidity to the RUB market, and also ease surging import inflation. The RUB's consequent advance added impetus to a broader RUB recovery, although the currency remains some 18.00% weaker than pre-war levels.

Hungary: EUR-HUF snapped the retreat seen in the last two trading sessions on the back of lingering geopolitical risks. The cross rallied by about 0.92% yesterday, erasing all the losses seen in the previous session and ending the day at the 373.79 mark. Ahead of the local open, the rally persisted, with the cross firming by 0.22% at the time of writing, extending its bounce away from the stubborn support at the 370 mark. Investors will look to offshore developments and the NBH rate decision for further directional momentum.

Poland: The EUR-PLN bulls regained control on Wednesday amid the lingering geopolitical tensions and a stronger US dollar buoyed by the hawkish Fed. The cross rallied by 0.91% to move back above the 4.70 mark and erase all the losses recorded in the previous two sessions. However, the move has not continued ahead of the Euro open as the cross is trading relatively flat at the time of writing. Technically speaking, the EUR-PLN stochastic issued a crossover buy signal in the oversold territory. So favour the bulls for now but keep stops tight. 

Czech Republic: Following the Deputy Governor's comments yesterday, the CZK gained 0.8% against the EUR, outperforming other major currencies tracked by Bloomberg, except for the Russian ruble to temporarily break above the 24.500/EUR mark. Due to Russia's energy demands, it soon unwound this move and settled lower at 24.696/EUR, the first sign of the correction. This morning, the CZK has fallen to 24.712/EUR, which sits above the 76.4% Fibo retracement level. From here, the CZK may weaken to the 61.8% Fibo, which coincides with the 100DMA support at 24.920/EUR.

Fixed Income: SARB to bridge gap in rates outlook between itself and the market today   

South Africa: SAGBs have been consolidative this week as the market awaits SARB rates. The general outlook for low growth and higher front-end rates should lead to a flatter curve shape, but given how much is already priced in we could see front end bonds outperforming if SARB guidance proves a little more dovish than anticipated by the FRA market. On that front, it is worth noting that the FRA market is pricing in a far more aggressive rate hiking cycle than the Quarterly Projection Model (QPM) has pencilled in. The QPM has a final repo rate of 4.91% pencilled in for the end of 2022, suggesting that around 90bp worth of rate hikes could be expected from current repo levels. By contrast, FRAs are pricing in roughly double that amount of risk. This suggests that the market is either overpriced relative to true SARB risk or predicts a massive shift in SARB guidance towards higher rates.

Turkey: Turkish USD-denominated debt attracted some mild demand on Wednesday, with most tenors shedding around 4bps from their yields through the session. This unwound some of the previous day's yield increases, although yields remain higher on the week. Recent hawkish Fedspeak has brought to the fore the prospect of an accelerated tightening of global financing conditions, and, in turn, triggered a bond-market rout earlier this week. There have been some tentative signs of stabilisation in the market, although the bias for yields remains to the topside for now.

Russia: Russian bonds came under some strong selling pressure on Wednesday, with yields rising across the curve by up to 50bps through the session. While this move was consistent with broader markets as investors digest the prospect of an accelerated tightening of global financing conditions, it also highlighted the fragility of Russian markets due to the Ukraine war and consequent Western sanctions. That being said, yields remain lower on the week after Monday's significant CBR-driven decline, although the market is still finding its feet after being shuttered in recent weeks.  

Hungary: A switch auction held on Wednesday saw the AKK sell HUF10bn of bonds maturing in 2033 and 2034, exchanging for the ones expiring in 2022 and 2024, after primary dealers' bid came in at HUF31.2bn. Interest for a switch to the  2033/A bonds for 2024/B bonds was most notable, with total bids arriving at HUF16.1bn and the agency selling HUF5.0bn, matching the initial plan. The AKK sold HUF2.5bn of 2033/A bonds, exchanging for 2022/B bonds as payments. Primary dealers had bid to switch HUF8.3bn. Lastly, the agency switched HUF2.5bn of 2034/A bonds, accepting 2024/B bonds as payments after receiving bids worth HUF6.8bn. Interest at the auction disappointed as the government failed to switch its full allotment. This could be attributed to investors preferring to hold short-dated tenors given the high uncertainty in the markets due to the ongoing geopolitical tension.

Poland: The scale of Poland's yield curve inversion yesterday declined slightly as yields at the short end of the curve dipped somewhat for the first time in three sessions. The 2yr POGBs yield drifted lower by more than 6bps while at the long end, the 10yr tenor rose by more than 7bps. This marginal reversal of the yield curve inversion is likely to be short-lived amid the rising inflation concerns. Poland's consumer inflation expectations within a 12-month horizon surged by 18.2pts to 54.4pts for March, highlighting that more rate hikes are needed to anchor these expectations. Expectations of higher interest rates alongside the ongoing geopolitical tension and the hawkish signal from the Fed should keep local bonds under pressure going forward.  

Czech Republic: The Finance Ministry sold a total of CZK14.9bn in bonds due in 2025, 2032 and 2035, exceeding its planned target of CZK13bn as demand rose with yields. Specifically, investors bid CZK29bn for the three notes, up from a demand of CZK17.2bn at an auction of different maturities two weeks ago. Meanwhile, in the secondary bond market yesterday, the yield on the CZK 10yr bond jumped 13bps to 3.84%, the highest in more than a decade amid the ensuing selloff in bond markets. The premium on the CZK benchmark bond over the German 10yr bond yield has spiked to a record high of 350bps, according to Bloomberg data.