Morning Note /

EMEA Daily: Hawkish Fed comments trigger deterioration in risk appetite

  • Market awaits latest sanctions package on Russia

  • EM currencies navigating surging USD, softer EUR

  • Russian CDS rates surge to signal rising default risk

Danny Greeff
Danny Greeff

Financial Market Analyst

Daron Hendricks
Edmond Muzinda
ETM Analytics
6 April 2022
Published byETM Analytics

Hawkish Fed comments trigger deterioration in risk appetite 

Talking Points: Market awaits latest sanctions package on Russia 

South Africa: An empty data card means the focus is on socio-political developments and President Cyril Ramaphosa's recent declaration to end the national state of disaster. Concerns have arisen, not over what the president said in his speech, but rather over what he left out. In particular, the government's plan to manage the COVID-19 pandemic with permanent amendments to existing health regulations has been criticised for normalising disaster-state restrictions and threatening individual freedoms. These amendments have not been finalised, however, and may not survive legal challenges in the months ahead.

Turkey: According to Turkey's statistical office (TurkStat), economic confidence continued to worsen as the country grapples with soaring inflation and a weaker lira. Turkey's economic confidence index fell to 95.7 points in March, a 2.5% drop compared to the previous month. Information from TurkStat revealed that the decline in the index stemmed from decreases in the manufacturing industry, services, retail trade and construction confidence indices. The most pronounced decrease was seen in services which fell by 6.2% to 111.3 points, and retail trade, which fell by 3.1% to 116.0 points. With the economic crisis likely to persist in the coming months as President Erdogan pursues his unorthodox economics, economic confidence is likely to fall further.

Russia: Ukrainian President Zelenskyy told the UN Security Council that Russia must be held accountable for war crimes and that more pressure be placed on Russia. Meanwhile, the US, EU, and G7 are preparing to launch a new round of sanctions against Russia, including a ban on new investments in Russia and a European ban on coal imports. The West continues to economically isolate Russia and crimp its ability to finance a war. The effects on the Russian economy will be severe, and it is set to shrink by at least 10% through 2022. Any recovery after that will prove difficult as the EU rotates away from Russian dependency.

Hungary: The data card will pick up with retail sales and NBH MPC minutes slated for release today. Hungary's consumptive dynamics deteriorated during the first month of 2022, reflecting the high prices eroding households' purchasing power. The retail sales growth fell to 4.10% in January, moving below levels that were seen before the outbreak of the COVID-19 pandemic and the five year average of 4.45%. Market expectations are for retail sales to rebound for February, supported by the economic recovery, high wages and tightening labour market. However, the soaring energy and food costs constraining households' budgets and growing concerns about global growth could hamper the retail sector's performance in the coming months.

Poland: Attention for today will be on the National Bank of Poland delivering its rate verdict. The central bank remains under pressure to try and curb inflation that is running hot. The preliminary CPI reading for March showed that inflation continues to trend higher after climbing to double-digit growth of 10.9%, heightening prospects of the central bank pressing ahead with monetary policy tightening. Forecasts compiled by analysts surveyed by Bloomberg are for the NBP to hike 50bps, taking the total rate hikes this year to 100bps.

Czech Republic: Today's economic calendar has several top tier releases, including trade data and industrial and construction activity. The respective readings for February are likely to be positive. However, the prospects for the months ahead are not optimistic, owing to the hit from the war in Ukraine and a slowdown in China's economy. Although leading indicators began to decline in February, they did not have a chance to capture the effect of the escalation of the conflict, which will affect imports and industrial production directly.

Forex: EM currencies navigating surging USD, softer EUR         

 South Africa: Momentum is to the topside for the USD-ZAR following Fed Governor Brainard's hawkish comments about balance-sheet runoff plans yesterday, which triggered a surge in UST yields and a broader deterioration in risk appetite. While a test of 14.5000 looked plausible yesterday, a break above 14.7000 is on the cards today, and a larger move could follow. However, techs suggest that investors should treat the USD-ZAR bounce as a necessary and healthy recovery rather than a longer-term inflexion point. A recent death cross pattern suggests the USD-ZAR's broader downtrend is likely to continue for a while longer, especially if SA's trade balance remains in surplus.  

Turkey: Despite the strengthening dollar and deepening negative real rates, the USD-TRY kept the range-bound theme intact. The pair continues to consolidate below the psychological 15.00 resistance. However, the risk to the bias in the pair is to the upside on the back of lingering geopolitical risks and the Fed's rate path. From the domestic backyard, inflation showing no signs of abating, political pressure to keep the CBRT biased towards low interest rates, and political uncertainty are also some of the factors that favour the bullish bias for the pair.

Russia: The RUB has remained stable around the 84.00/$ mark, still consolidating after its strong recovery due to capital controls and President Putin's demand that non-friendly countries pay for Russian gas in RUB. The near-term outlook for the RUB remains one of consolidation around current levels, owing to continued capital controls and a lack of free-market pricing. Looking beyond this, however, the RUB may be vulnerable to weakness, given sanctions over the Ukraine war and the impact thereof on economic growth.

Hungary: The Hungarian forint came under stern selling pressure yesterday following the decision by the European Commission to trigger the new conditionality mechanism against Hungary for backtracking on the rule of law and failure to secure necessary changes from Hungary on issues relating to corruption. The local unit tumbled by about 1.78%, extending its losses to two consecutive sessions and reaching the 375.43 mark, its worst performance in three weeks. The sell-off in the forint has continued ahead of the local open, depreciating by 0.37% at the time of writing. In the session ahead, investors will look to local data releases and FOMC minutes for further directional guidance.

Poland: Consistent with the performance in the CEE region, the Polish zloty was on the back foot against the EUR on Tuesday. The local currency depreciated by about 0.68%, erasing all the gains realised in the previous session and closed the day at 4.6512. The EUR-PLN pierced above the 50-SMA, potentially paving the way for further gains. Investors, however, appear to the erring on the side of caution this morning ahead of the MPC meeting. Overnight implied vol levels have risen for the third consecutive session to reach 14.095% at the time of writing. This suggests that options traders are uncertain about this key event risk and are pricing in a higher hedge to protect themselves from some PLN volatility.  

Czech Republic: The EUR-CZK perked up slightly on Tuesday, snapping an eight-day losing streak after closing at 24.366 due to influences abroad. Investors kept a close eye on the European Union's plans to introduce fresh sanctions against Moscow. Meanwhile, the EUR-USD has fallen to a four-week low, dragged down by concerns over the outlook of the bloc's economy amid the war in Ukraine and surging inflation. This has kept the EUR-CZK on the front foot this morning as it probes the 24.400 mark. A break above this level and a crossover buy signal would suggest that the EUR-CZK's bearish bias has ended. Investors can expect some volatility in the session ahead as markets wait for the minutes from the latest Federal Reserve meeting for fresh insights into its tightening plans.

Fixed Income: Russian CDS rates surge to signal rising default risk     

South Africa: Auction demand remains telling with the front end of the curve receiving most of the attention at the auction yesterday, while longer-term options were out of favour. This suggests that curve steepening could be seen from an investor demand perspective, as long-term risks lead to reduced demand for long-dated tenors. On net, demand rebounded to a six-week high of R12.1bn from R10.2n in the week prior. This pushed the overall cover ratio up to 3.1x from 2.6x prior. Investors favoured the shorter-dated R2032, which attracted most of the bids to generate a bid-cover ratio of 3.8x. This was followed closely by the R2037 with a bid/cover of 3.6x and trailed by the R2040, which was 1.9x subscribed. Note that the R2032 has attracted the highest issuance on a year-to-date basis at R9.1bn, which stands to reason given its 10-year maturity date which is favourable to both the government and investor base.

Turkey: Turkish local currency bonds have been under pressure at the start of the week, with investors weighing the high yields on offer against extremely elevated inflation and another S&P ratings downgrade. Moves of over 40bps were seen at the long end of the curve, leading to a sharp bear steepening bias. USD-denominated bonds may thus prove relatively more attractive in the near term, with selling pressure expected to persist in the local currency bond.

Russia: The price of insuring Russia's debt against default (as reflected in CDS rates) jumped to a new record high on Tuesday, after the US Treasury stopped the Russian government from paying holders of its sovereign debt more than $600m from reserves held at American banks in a move meant to eat into Russia's USD holdings and ratchet up pressure on Moscow. This also drove up yields at the long end of the OFZ curve through the session, signalling growing default risk.

Hungary: Interest in the T-Bills auction held yesterday improved, with total bids from primary dealers arriving at HUF99.3bn versus HUF83.3bn on March 29. This prompted the AKK to sell HUF50.0bn of discount three-month T-bills, in line with the original offer and generating a cover ratio of 1.99 (vs 1.67 last week). The average clearing yields also increased during yesterday's auction. T-bills cleared at 5.84%, 3bps higher than the yield at the previous auction of the bills a week earlier and 19bps over the secondary market benchmark. The continued strong demand for T-bills could allude to investors preferring to hold short-dated tenors amid the lingering market uncertainty and the higher yields on offer as the central bank continues to hike interest rates to stem inflation.

Poland: A payer bias persisted along the IRS curve on Tuesday, with swap rates rising across the curve on the back of dialled up speculation that the central bank will continue tightening monetary policy to try and arrest runaway inflation. The swap curve shifted higher, with a more pronounced jump seen in the 10yr tenor, which drifted higher by more than 8bps to 4.935%, its highest in more than a week. At the front end of the curve, the 2yr swap rose more than 7bps to reach a multi-year high of 6.015%. As a result, the 10v2 spread remains deeply inverted, sitting at about -108bps. With the central bank likely to hike the base rate today, the swap curve inversion will likely remain entrenched.

Czech Republic: CZK bond yields rose sharply on the front-end and the belly of the yield curve, up 15bps and 10bps, respectively. Strong inflationary pressures stemming from the war in Ukraine and the possibility of tougher sanctions against Russia raised expectations of more aggressive monetary policy tightening by major central banks. This backdrop will likely keep bonds under pressure.