Morning Note /

EMEA Daily: Growth concerns keep investors on edge

  • SA's governing ANC party hints at fundamental policy shift

  • EM bonds supported in risk-off trade

  • Controls keep TRY and RUB stable as other EM currencies struggle at the start of the week

Danny Greeff
Danny Greeff

Financial Market Analyst

Daron Hendricks
Daron Hendricks

Financial Market Analyst

ETM Analytics
26 April 2022
Published byETM Analytics

Growth concerns keep investors on edge

Talking Points: SA's governing ANC party hints at fundamental policy shift  

Global: Is it justified for the US yield curve to invert or not? While US equities produce strong earnings results, the default answer will likely be no. However, this is the wrong question to ask. More importantly, the question to ask is when? While inflation is rising and proving to be a major headache for central banks trying desperately to retain their status as inflation fighters, they must tighten monetary policy through higher interest rates. It is part of the cycle which will eventually turn, and a downturn will follow, possibly even a recession. What needs to be questioned is whether aggressively hawkish guidance by the central banks is enough to do this already. Central banks use verbal guidance as a tool to prompt financial markets to adjust long before a policy-changing decision is taken and implemented. The greater the credibility of the central bank, the greater the market response, and the heavier the burden of self-regulation that is carried by the financial markets themselves to moderate the cycle.

South Africa: Various reports have emerged suggesting that the ANC is ready to formally open up to greater private-sector involvement in SA's economic recovery, a radical policy shift for an organisation that has long been a strong proponent of state-led growth. In a discussion document that will reportedly be tabled at a policy conference later in the year, greater inclusion of the private sector in SOE operations and infrastructure funding will be debated by the governing party. This may be a watershed moment for SA, and should be cheered. State-led growth has been ruinous for the country, as previously proud institutions were systematically dismantled, and without accountability, became the targets for state capture. The ANC's brand of populism may be nearing a dead-end, increasingly falling on the deaf ears of South Africans struggling with extreme unemployment and a lack of opportunity for a better life.

Turkey: Turkish President Tayyip Erdogan rebuked his US counterpart, Joe Biden, for his remarks commemorating the Ottoman-era mass killing of Armenians a year after he recognised them as genocide. "Mr Biden should learn and know the history with the Armenians very well. We cannot forgive him for trying to challenge Turkey without knowing these things," Erdogan said.

Russia: In an interview, Russian Foreign Minister Lavrov warned of the risk of WWIII and said US weapons have become a legitimate target, adding that NATO is fighting a proxy war. He lamented the amount of support that Ukraine has received from the West and the difficulties it faces. Lavrov then suggested that talks with the US could be useful, as UN SecGen Guterres continues diplomatic effots to end the war in Ukraine with a trip to Moscow.

Hungary: Given the sensitivity of financial markets to monetary policy at the moment, market impetus in the session ahead will almost certainly stem from the NBH's rate decision. It is widely expected that the NBH will deliver a 100bps rate hike, taking the Base Rate to a fresh multi-year high of 5.40%. While the NBH left its key interest unchanged for a third straight week last week, we expect policymakers to raise the base rate by 100bps today amid a deteriorating inflation outlook and a persistently weak currency. The central bank has used the one-week rate primarily to counter currency depreciation in recent months.

Poland: The Polish banking lobby noted yesterday that it is going to analyse the details of the plan announced by Premier Morawiecki yesterday that aims to help borrowers. The lobby wants to ensure that the plans won't undermine the stability of the banking sector and its ability to continue financing the economy. The plan announced by Premier Morawiecki includes replacing the benchmark loan rate, WIBOR, and offering a moratorium for borrowers for three months in order to provide them with some relief from rising interest rates. The measures are aimed at reducing service costs by a quarter, while Morawiecki says that it will help strengthen the local currency. The margin on loans for banks will need to be reduced by a sixth, according to the Premier while increasing rates on deposits. Banks will also have to provide PLN3.5bn to another fund, while adding PLN1.4bn of capital to a support fund

Czech Republic: Economic confidence in the Czech Republic picked up slightly in April, rising by 3.4 points to 100 points. The improved economic sentiment was attributed to increased optimism among businesses, while consumer confidence plummeted to its lowest level since November 2012, according to the Czech Statistical Office (CZSO) yesterday. The Ukraine war has had a significant impact on consumers' confidence as they grapple with rising living costs. In contrast, the war is having a gradual effect on companies, but the relatively small impact is surprising. The improvement in business confidence is good news against the backdrop of high energy and material prices, supply shortages, and the Ukraine war persisting. It remains to be seen if this improved optimism can be sustained in the months ahead as supply bottlenecks are expected to last longer than initially expected amid the war and China's draconian Zero Covid policy.

Fixed Income: EM bonds supported in risk-off trade      

South Africa: Although yields nudged a little higher yesterday, they were not sustained, and this morning, a yield dip is expected to follow that will be exacerbated should the ZAR start to stage a recovery. The curve reflects a hint of flattening if the R2048-R186 spread is anything to go by, but much will depend on how the short-end of the curve performs in the coming days. All eyes will be on US earnings, China's Covid episode and the growth dynamics in Europe. A weaker global growth backdrop and return of stability in the ZAR will almost certainly translate into greater stability and support for local bonds, across the curve.

Turkey: Turkish bonds performed relatively well at the start of the new week, with yields generally falling through yesterday's risk-off trade. While other countries are hiking interest rates, the CBRT has consistently shown a reluctance to do so despite mounting price pressures. This has kept topside pressure on yields contained, with the broader trend for Turkish yields remaining to the downside.

Russia: Russian bonds weakened yesterday, with yield rising across most of the curve through the session. Notably, the short-end of the curve remained anchored, with the 2-year bond even shedding from its yield on the day. This reflected market expectations for the CBR to gradually normalise interest rates after the sharp hikes over the past few months. This was also consistent with market expectations for a rate cut later this week.

Hungary: Global bond markets kicked off the new week on the front foot as fears over the Covid situation in China added to growing investor concern that the aggressive Fed tightening will hurt economic growth. US Treasury yields plunged yesterday as traders readjusted their interest rate forecasts. Hungarian bonds joined in on the rally the global rally in bonds. That said, movements in domestic bonds were modest in comparison to other bond markets, with the benchmark 10yr and the shorter-dated 3yr bond yields, for instance, shedding 4bps and 2bps to 6.99% and 6.72%, respectively. 

Poland: POLGBs rallied across the curve yesterday, with yields down between 9bp and 13bp as global bonds kicked off the new week on the front foot. However, it is questionable whether or not these moves can be sustained. We have UST yields rising once again this morning, while local inflation dynamics remain in focus given the new banking sector plans, which could limit the tightening impact of higher rates and keep price pressures embedded in the economy. Therefore, yesterday's gains for POLGBs could be faded very quickly. FRA rates were also subjected to some receiver interest on the session, with the 12x15 FRA for instance falling to 6.95% yesterday. This keeps it around 121bp above 3-month WIBOR, suggesting that there is still a lot of rate hike risk priced in, which could be further embedded given the new measures aimed at the banking sector.

Czech Republic: Domestic bond yields fell moderately across the curve at the start of the week following a late retreat in US Treasury yields, as concerns grew that more COVID-19 lockdowns in China and potentially rising US interest rates would hurt global economic growth. The 2yr bond yield fell just over 4bps to 5.1795%, while the benchmark 10yr bond yield fell slightly less to 4.2123%, with the 10v2 bond yield spread remaining deep in negative territory of 97bps. With investors' concerns over global growth trumping faster Federal Reserve policy tightening expectations, the local yield curve risks inverting further.

Forex: Controls keep TRY and RUB stable as other EM currencies struggle at the start of the week

South Africa: The ZAR extended its bear-run with a further 0.65% depreciation yesterday. This performance was consistent with broader EMFX, as global growth fears related to China's COVID-19 lockdowns and an aggressive Fed monetary tightening outlook triggered risk-off trade at the start of the week. Heading into today's local trading session, there are signs of improving risk appetite as equities and commodities have regained their footing overnight after China pledged more economic support to counter the impact of ongoing lockdowns. Most EM currencies are also recovering against a slightly-softer USD, with the ZAR amongst these as it moves further away from yesterday's intraday high of R14.7900/$. Notwithstanding strong headwinds in the market, the ZAR's recent selloff may begin to look a bit stretched as the week progresses, with moves this large and fast having been difficult to sustain in the past.

Turkey: The TRY weakened marginally against a broadly-firmer USD yesterday, but generally remained consolidatory within its recent channel. It outperformed most of its EM peers in risk-off trading conditions on the day, after the CBRT's move to support the currency by tweaking lending rules. Recall that the central bank revised some reserve requirement rules for banks to curb loan growth and encourage the conversion of foreign exchange into the local currency.

Russia: The RUB appreciated more than 3% yesterday, still supported by tax payments that companies are due to make this week. On the whole, the story remains the same: capital controls and energy exports have supported the RUB significantly in recent weeks, while it it has found extra bullish impetus at the end of the month from currency conversions for tax payments. Whether this can be sustained, however, remains to be seen, especially since the CBR may well decide to cut the benchmark interest rate later this week to support the economy.

Hungary: Notwithstanding the upbeat economic sentiment and expectations for another bold rate hike today, the HUF kicked off the week on the back foot, extending its losses from Friday's session. The HUF closed Monday's session 0.71% weaker against the EUR at 374.46, according to Bloomberg data. The losses in the HUF came on the back of dampened risk sentiment relating to growth concerns in China as it continues with its covid zero policies and the adverse impact of the Ukraine war on Europe. While price action stemmed from external developments yesterday, domestic markets will likely move on the back of the NBH's forward guidance at its rate-setting meeting later today. The HUF has rebounded smartly this morning, paring back almost all of its losses suffered against the EUR during early trade.

Poland: Not much to report back on in terms of the EUR-PLN as it remains rangebound, trading between the 50DMA above at 4.6772 and the 100DMA below at 4.6246. The cross is expected to remain within this trading range over the near term, not moving too far away from the 4.64000 level. The cross awaits a new catalyst, leaving the global risk narrative to drive direction for now. The risk-off conditions suggest that the cross should remain near the upper bound of this recent trading range for the time being. The options market, meanwhile, is unwinding a lot of its bearishness against the PLN, with the 1-month risk reversal declining to around the 2.7275 EUR-call mark, its least bearish on the PLN since the start of March. There is still a long way to go before we are back at pre-invasion levels, but as the markets adjust to what is going on currently, we could see it continue to normalise.

Czech Republic: The EUR-CZK's bearish bias came to a halt yesterday. The pair bounced off the 254.300 support to close at 24.472 after testing the 24.500 resistance as the hawkish rhetoric of the CNB wanes. Furthermore, the EUR-USD fell below a key support to a two-year low. Yesterday's price action reflects the sharp deterioration in risk appetite and uncertain macroeconomic backdrop. The pair has firmed ahead of the European Open and is likely to test a break above the 24.500 resistance level. Meanwhile, the EUR-CZK stochastics have risen this morning, with their slide into oversold territory reversing quickly.