Global developments to eclipse EMEA data this week
Talking Points: Reports of progress in Russia-Ukraine talks treated cautiously
South Africa: The domestic data card is relatively sparse this week, with a bond auction, BER consumer confidence data and retail sales due for release. The data holds significance in assessing how SA’s economic recovery is developing. However, with load shedding becoming particularly acute in recent months while fuel prices eat into consumer wallets, the retail sector is likely to experience some headwinds. The political focus will sit with question time in parliament for President Ramaphosa (Thursday) and Deputy Mabuza (Wednesday), who will answer MP questions on separate days. The questions occur every year but have some added pressure this time as there is a vote of no-confidence against Ramaphosa scheduled for the end of March.
Turkey: Macroeconomic data released on Friday showed that Turkey’s external position weakened further at the start of the new year. The current account deficit widened for the third consecutive month from -$3.84bn in December to -$7.11bn in January, the worst monthly figure since the end of 2017. The latest figure was less pronounced than a deficit of $7.30bn estimated by economists surveyed by Bloomberg. The deterioration in the current account resulted from a more than quadruple energy deficit of $8.1bn and a lower core trade surplus despite the narrower gold balance and further recovery in services revenue. The weak external position could see the local currency remain under pressure as it increases its vulnerability to external shocks. Going forward, Turkey’s current account deficit is likely to widen further in the coming months on the back of high global commodity prices, especially in energy, due to the fallout between Russia and Ukraine.
Russia: Note that Russian and Ukrainian officials have been quoted as saying that there has been significant progress in recent talks between the two sides. Further details remain scant, however, suggesting any market optimism to this news should be treated with caution until a meeting between Presidents Putin and Zelenskyy is confirmed. In the meantime, Russia’s invasion of Ukraine continues, while the plot has also thickened with reports that Russia had asked China for support. This sparked concerns in Washington that Beijing may undermine Western efforts to pile pressure on Russia with stringent sanctions, with US and Chinese officials set to meet later today to discuss the matter.
Hungary: Market closed due to a public holiday.
Poland: Over the weekend, Poland’s Prime Minister Mateusz Morawiecki announced that Poland will prolong anti-inflation measures aimed at cushioning the impact of rising gasoline and food costs on consumers as the country battles the highest inflation in more than two decades. The current package of tax cuts on everything from food to fuels was earlier slated to end in July. PM Morawiecki also told the media that his government is working on an anti-Putin shield as they are at a historic moment where they need to resist this brute force. This statement comes as Poland ratchets up calls for tough EU sanctions to Punish Russian President Vladimir Putin for his invasion of Ukraine.
Czech Republic: Retail sales data for January is on tap at the start of the week. Recall in December, retail activity fell sharply, undershooting economists’ expectations. Specifically, retail sales grew by 2.1% y/y in December, following a reading of 9.9% y/y in the month prior. The y/y figures are still distorted by a high statistical base, resulting in weaker growth in the sector. As these effects abate amid the relaxed restrictions and a fairly tight labour market, we should see retail activity stabilise and return to more traditional spending patterns.
Forex: EM currencies struggle for traction at start of an eventful week
South Africa: There is thus plenty to consider at the start of the new week. However, the ZAR could sustain its recent resilience as long as commodity prices hold up. The market will likely continue to trade the ZAR on Russia-Ukraine headlines, with the broader rotation of capital away from European EMs and into commodity exporters far away from the war keeping the ZAR attractive, for now. Technically, the market is looking comfortable keeping the USD-ZAR between its 200-session moving (15.0200) and a resistance line at 15.1000 for the time being, but short-term implied vols remain elevated to suggest there are growing risks to this consolidatory pattern.
Turkey: During the week’s final trading session, the USD-TRY took a hiatus, snapping the rally seen in the last eight sessions. The pair slipped by 0.60% as emerging markets were offered some respite after global sentiment improved after Russian President Vladimir Putin cited positive developments in talks with Ukraine. However, the broader bias shows that the bulls were in control last week, with the USD-TRY racking in gains of about 4.00%, extending its winning streak to four successive weeks. Going forward, the weak underlying macroeconomic fundamentals and unfavourable external conditions suggest that the topside bias in the pair will remain entrenched.
Russia: The RUB continues to consolidate its war-induced losses, although trade in offshore markets suggests there may be some tentative bullish momentum emerging at the start of the new week. The market is digesting reports of progress in recent talks between Russian and Ukrainian officials, and news that Russia may use its relationship with China to bypass some of the West’s recent sanctions. At the same time, however, there is a growing chance that Russia will default on some of its debt this week, with this dampening any market optimism towards the RUB.
Hungary: Market closed due to a public holiday.
Poland: Consolidation was the order of the day on Friday for the EUR-PLN as investors assessed the ongoing developments in the Russia-Ukraine war. Intraday, there was a tug-of-war between the bulls and bears before deciding to call it a draw and end the day relatively flat. Zooming out, following the recent retreat from record-high levels, the cross managed to end the week with losses of 0.28%, marking the first time in three weeks. With the situation still dire between Russia and Ukraine, the retreat in the EUR-PLN is unlikely to be sustained in the sessions ahead.
Czech Republic: The CZK remained on the front foot on Friday, extending gains to a fourth straight session. The CZK added gains of +0.23% on the back of improved global risk appetite and advanced along with its Visegrad peers. It was a week for the CZK bulls as the local currency recorded its first weekly gain in 3 against the EUR. Note that further support for the CZK last week emanated from stronger than expected CPI data that bolstered rake hike bets.
Fixed Income: All eyes on potential Russian bond default this week
South Africa: There has been considerable downside pressure on SAGB yields from recent highs reached on the 8th of March. The curve has bull flattened over this period with the long end down around 60bp to trade around 10.7-10.8% while the R186 yield has lagged the move with 48bp worth of downside pressure to bring its yield to 8.31%. The ALBI has rallied 3.8% from March lows and could continue to rally if oil prices continue to calm.
Turkey: Consolidatory trade on Friday means the Turkish yield curve ended the week significantly higher than what it started. Turkish bonds have struggled in the face of deteriorating global sentiment and concerns over growing inflationary pressures stemming from the Russia-Ukraine war. Developments on this front will likely continue to drive the Turkish bond market in the near term, while the market will also be bracing for a central bank policy decision later this week.
Russia: This week, Russia looks set to technically default on $117m in coupon payments on two dollar-denominated bonds. This links to sanctions, where international banks have frozen Russia’s USD capital. According to official sources, Russia has over $640bn in FX reserves, but it seems as though this capital is not accessible for debt service. Newswires report that around $200bn of these reserves may still be unsanctioned, yet it seems as though Putin is looking to raise the stakes wherever possible. Rather than opt for USD payment, Moscow has threatened to pay the bondholders in Roubles. While this may escape domestic scrutiny, it is tantamount to default in international law and could have some ramifications in USD lending markets.
Hungary: Market closed due to a public holiday.
Poland: According to Karol Czarnecki, who manages public debt at the Finance Ministry, there has been an increase in foreign investors returning to the local debt market despite the elevated market volatility due to the unfavourable external conditions. The rise in demand for domestic debt is being driven by the higher yields on offer. The aggressive monetary policy tightening and the heightened political risks after Russia invaded Ukraine underpin the surge in domestic bond yields. With the current situation requiring restraint in assessing that demand, Czarnecki remains optimistic in the long term, given the strong underlying fundamentals.
Czech Republic: Payer interest dominated along the IRS curve on Friday. Rates were broadly higher across the curve, with more pronounced movements observed at the long end of the curve. Specifically, the rates on the 7-year and 10-year tenors rose by 10bps and 9bps, respectively. At the front-end, the 2-year tenor rose by a modest 3bps. As a result, the swap curve bear steepened. Retail sales data today could provide some fresh directional impetus for swaps.