Morning Note /

EMEA Daily: Escalation of Russia-NATO standoff weighing on risk appetite

  • Risk-off the order of the day after Putin orders troops into two breakaway regions of Ukraine

  • EM contagion risks high, but ZAR trading with some resilience due to support from surge in gold prices

  • Some idiosyncratic trade expected for HUF with NBH expected to deliver rate hike today

Danny Greeff
Danny Greeff

Financial Market Analyst

Michael Potgieter
Daron Hendricks
Takudzwa Ndawona
Edmond Muzinda
ETM Analytics
22 February 2022
Published byETM Analytics

Talking Points

South Africa: Given new developments in the ongoing Russia-NATO standoff around Ukraine, geopolitical risks will remain the focal point for markets through the week ahead, This will detract from local developments such as today's release of SARB leading indicator stats and tomorrow's budget speech. These – in particular the latter – may still hold some market-moving power, however, and either bolster the ZAR's resilience or render it more vulnerable to external dynamics.

Regarding today's local data release, the SARB's leading indicator has climbed in consecutive readings, indicating that economic growth is returning to normal after the devastation brought on by COVID-19. This has primarily been supported by the relaxation of restrictions, increasing vaccinations, policy support, and easing global headwinds. However, recent data has shown that the recovery is not uniform, with some sectors rebounding at a slower pace than others, implying that a more rapid upswing in the business cycle may take some time. Furthermore, insufficient structural reforms, unstable electricity supply, and global liquidity withdrawal will continue to cast a shadow over South Africa's economic prospects.

Turkey: Today, the data calendar picks up with February real sector confidence and capacity utilisation data on tap. The adjusted manufacturing confidence index rebounded at the start of the new year to 111.9 from 110.1 in the trailing month, reflecting that companies are still optimistic about the outlook of economic activity. However, factors on the radar, namely ongoing supply-side constraints, high inflation, and a weaker local currency driving costs of raw materials higher, are key risks that could detract from a sustained improvement in the real sector. Although this is a leading indicator for the economy, it will unlikely be too market-moving today.

Russia: Russian President Putin has upped the ante in the Russia-NATO standoff over Ukraine. In a lengthy televised address, Putin recognised the independence of the two breakaway regions Donetsk and Luhansk in eastern Ukraine, and ordered the deployment of Russian troops into these regions to "keep the peace" after recent artillery shelling between their rebel soldiers and those of the Ukrainian army. While this is potentially just Putin playing a trump card ahead of upcoming negotiations with the US, Russian troops are looking increasingly poised for invasion and the chances of accidental military contact that could escalate into full-blown war have risen. Putin's actions are a clear signal of intent that he would not allow NATO's eastward expansion towards Russia's borders to continue any further, and the risk of war is that much higher than before. Naturally, these actions have drawn strong US and European condemnation and vows of new sanctions, with these expected to be announced today.

Hungary: Focus today will fall on the NBH MPC meeting. Last week, Deputy Governor Barnabas Virag pledged that the NBH will continue to hike rates to fight soaring inflation, proving more durable than previously forecasted. Hungary's headline inflation surprised to the upside in January, reflecting supply-side disruptions, high CO2 emissions allowances, rising energy, food, and fuel prices. Core inflation (which excludes food and fuel prices) has also been edging higher, highlighting that the underlying price pressures are also contributing to the overall inflation. Given the persistent price growth, more tightening is warranted, with a 50bps rate hike expected today.

In other news, the Hungarian parliament announced yesterday that they will elect a new president on March 10 as the current president Janos Ader is nearing the end of his second term in office. The candidate for the ruling Fidesz party is Katalin Novak, who was nominated by Prime Minister Viktor Orban. Novak, who is a loyal Orban supporter, could be elected in the first round, given that the ruling party holds the necessary two-thirds majority. If elected, Novak, the former minister for family affairs, will be the first woman in the country's modern history to take over as head of state.

Poland: Poland's economic growth outlook is likely to remain supported following the improvement in the country's consumptive dynamics. Data released by Poland's Statistical Office showed that retail sales growth accelerated more than expected at the start of January, coming in at 20.0% y/y compared with 16.9% in December. This strong macroeconomic data coupled with the soaring inflation provides ammunition for NBP hawks to press harder for further rate hikes in the coming months.

Today, investors will scrutinise the M3 money supply statistics. Poland's money supply growth slowed in the final month of 2021 to 8.90%, and the market expects this trend to continue for January. Notwithstanding the expected deceleration, the money supply environment will remain relatively loose, which should keep inflation pressures elevated in the coming months. This will also corroborate the case for the central bank to stay committed to tightening monetary policy further.

Czech Republic: In a presentation yesterday, Czech central banker Tomas Holub reiterated that inflation would peak in the first half of this year and gradually decline afterwards due to an appreciating koruna and the effects of monetary policy on domestic demand. Of course, this viewpoint is still subject to supply factors, which are currently a major driver of consumer prices in the Czech Republic. Core inflation will accelerate further at the beginning of this year due to rising costs against a backdrop of strong domestic demand and a tight labour market. Holub stated that the effect of the January revaluation is likely to be felt as manufacturers and firms set their new prices for the year ahead. The bottom line is that policy easing will not be considered until inflation eases.


South Africa: The immediate impact of escalated Russia-NATO tensions on the ZAR has been a sharp depreciation back towards R15.2000/$ overnight, as the market has rotated out of risk assets and into safe havens more broadly. However, it is still unclear how the ZAR will react should the dust begin to settle and EM contagion fears ease. This follows as gold has hit multi-month highs on safe-haven demand, which will support SA's terms of trade and, potentially, also the ZAR. Furthermore, aversion towards Russian markets has made South African assets all the more attractive for those investors still looking for relatively safer EM exposure and high yields. That being said, the likes of safe-haven currencies such as the JPY and USD remain king for now, with risk aversion and EM contagion still playing out at the moment. 

Turkey: Yesterday's was an uneventful session for the USD-TRY as it traded relatively flat, within its broader consolidatory channel. The stability evident in the pair remains a function of the new government tools, including FX-protected deposits. As a result of the stable performance in the USD-TRY, implied volatility levels have moderated significantly since the start of the year. The 1-month implied vol. has dropped by more than 77% to hover at levels that were last seen in mid-November.

Russia: The RUB sunk to a more-than 15-month low on escalating fears over a Russian invasion of Ukraine and the Western sanctions this would trigger. This followed after President Putin ordered the deployment of Russian troops into two breakaway regions of Ukraine, as he upped the ante ahead of scheduled negotiations with the US. Note that the RUB suffered its biggest one-day drop since the outbreak of the COVID-19 pandemic yesterday, and although it has since consolidated with the market in wait-and-see mode ahead of more Western sanctions that are set to be announced today, it remains extremely vulnerable and could extend its losses through the rest of the week.

Hungary: The EUR-HUF remained in a narrow range yesterday as investors erred on the side of caution ahead of the key NBH MPC meeting slated for today. The cross was subject to some whipsaw action before closing the day in a consolidatory channel for the second consecutive session. Overnight implied vol. rose for the second straight session to reach 11.275% at the time of writing, its highest level since December 1. This could suggest that options traders are more anxious about the key risk events, the MPC meeting and the escalating geopolitical tension over the Russia-Ukraine saga.             

Poland: The EUR-PLN traded relatively flat yesterday, bringing to a halt the rally seen in the last three sessions. The cross managed to recoup all the losses that were realised in the early morning session as emerging markets cheered the short-term de-escalation following Putin-Biden agreeing to engage in talks over the Ukraine invasion. In the early morning session, the EUR-PLN has resumed its advance, rallying 0.28% at the time of writing as geopolitical tension escalated overnight after Russia recognised two separatists "people’s republics” of Luhansk and Donetsk as independent from Ukraine. Given the increased haven demand, the EUR-PLN could advance further in the session ahead.

Czech Republic: Following a rapid deterioration in risk appetite due to events in Ukraine, the EUR-CZK bounced off the 24.300 support on Monday to post an intraday high of 24.433 before closing just above 24.400 level. It will be a risk-off session for the eurozone today as the Ukraine crisis is driving demand for safe-haven assets. The EUR-CZK has firmed and may set its sights on the 50DMA at 24.592 should the current backdrop prevail. Looking back over the previous two months, the exchange rate has been more or less stable in the region of 24.200 - 24.600, with a very modest trend to long-term weakening as the central bank continues to tighten policy settings. However, the heightened geopolitical risks could see the EUR-CZK regain some ground should it break above the 24.600 resistance level.

Fixed Income

South Africa: The market is experiencing a surge in optimism as the government appears to be reining in fiscal profligacy. But how this will be received in the context of rising concern surrounding the risk of full-blown Russia-Ukraine conflict is an open question. At the very least a risk-off move globally will slow the bull flattening of the curve, but if National Treasure continues to script on the fiscal reform outlook, bonds could outperform through the rest of Q1, particularly if investors globally move out of other EM assets and into SAGB exposure.

Turkey: Turkish government bonds started the new week in a mixed fashion yesterday, with front-end tenors generally shedding from their yields, while those at the belly of the curve added to their yields. Today, the market will primarily find directional cues from external developments, with fears over an escalation of geopolitical tensions around Ukraine front and centre at present. This may dent demand at today’s primary auctions, where the Turkish government will be offering 10-year CPI linkers and 4-year TLREF-indexed bonds.   

Russia: Russian bonds sold off sharply on Monday, with yields rising by more than 60bps across the curve through the session. This reflected concerns over what Western sanctions are on the cards today after Russian President Putin recognised the independence of the two breakaway regions Donetsk and Luhansk in eastern Ukraine, and ordered the deployment of Russian troops into these regions. The 1-year bond led the charge, adding as much as 98bps to its yield through the session. The market will likely remain volatile today, as investors await the announcement of Western sanctions.

Hungary: The first reading of data released by the NBH showed that Hungary’s state debt relative to GDP improved in the final quarter of last year. Specifically, the ratio dropped from 80.3% at the end of Q3 to 78.2% on the back of the economic recovery. Despite the drop, the state debt/GDP ratio remains stuck above the stipulated ratio of 50% as the government continued to borrow to help jump-start the economy. The ratio is expected to arrive at 79.9% at year-end partly as a result of the election spending by PM Viktor Orban’s administration. 

Poland: Polish bonds were a mixed bag during the first trading session of the week. Yields at the front and long end of the curve declined, with the 2yr POLGB dipping more than 4bps to 3.5033%, the lowest in almost two weeks and the 10yr tenor fell about 6bps. Meanwhile, the 5yr tenor came under some pressure, with its yield rising more than 2bps. The bull flattening bias in the curve is likely to be short-lived amid prospects of monetary policy tightening in the US and the eurozone. An additional headwind for local bonds is the soaring inflation, which could see the NBP tighten the policy rate for a prolonged period.

Czech Republic: Czech bonds strengthened slightly yesterday but will need to brace for tough times ahead as the world shifts towards tighter policy, global inflation risks remain elevated and lastly, the Ukraine crisis. As tensions over Ukraine intensify, expectations of the Fed’s March hikes moderate. However, even if all the political risk was removed, oil prices and inflation remain an issue. The risk here is the CZK’s inverted yield curve remains entrenched, even if it uninverts in the short-term.