Morning Note /

EMEA Daily: Idiosyncrasies back to the fore in EMEA at the start of the week

  • Hungary PM Orban's decisive election victory secures fourth term in office

  • RUB consolidates near pre-war levels after strong recovery

  • SAGB's to benefit from Moody's ratings outlook upgrade

Danny Greeff
Danny Greeff

Financial Market Analyst

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

Idiosyncrasies back to the fore in EMEA at the start of the week

Talking Points: Hungary PM Orban's decisive election victory secures fourth term in office 

South Africa: The new week begins on a positive note after Moody's upgraded SA's ratings outlook from negative to stable on Friday. While this change only means that Moody's expects SA's sovereign credit rating to remain where it is at two notches below investment grade, it recognises the government's effort to consolidate the country's fiscus and halt a further slide towards a full-blown crisis. Of course, much of SA's fiscal improvement of late was brought about by good fortune, with a global commodity boom and a significant revision to GDP estimations the core reasons. Nevertheless, this bought the government time to advertise plans for much-needed reforms and improved the general narrative around SA's fiscal outlook, which ultimately led to this outlook upgrade. In particular, Moody's highlighted that the government had "for the first time in many years" limited the growth of its wage bill to well below inflation. This went a long way in restoring the credibility of the budgeting process, with Moody's expressing confidence that the government will stick to its debt consolidation plans while SARS rebuilds to ensure efficient tax collection.

Turkey: Headlining the data calendar today are the latest CPI and PPI statistics. The former has been on an upward trajectory since September 2020 on the back of the collapse in the lira and rising global commodity prices. Forecasts compiled by Bloomberg show that headline inflation rose even further for March on the back of the Ukrainian war fanning energy and food costs even higher. Another increase in inflation will push the world's deepest negative real rate further into negative territory, keeping the Turkish assets and lira under pressure.

Russia: EU nations have again warned that they may impose additional sanctions on Russia in response to reports of alleged war crimes in the Ukraine war. Ukrainian officials maintain that Russian troops executed unarmed civilians in certain towns, and have urged foreign authorities to investigate the matter. Some EU nations argue that this should trigger even more penalties on Moscow, although there is still no consensus in the bloc over the details of a new punitive package. Russia, meanwhile, dismissed the claims of war crimes, with Kremlin spokesperson Dmitry Peskov saying that it is clear to the naked eye that there are a lot of fakes and staged photos circulating.

Hungary: The start of the week is headlined by political news flow. Prime Minister Viktor Orban scored a crushing election victory to clinch a fourth consecutive term during the general elections held on Sunday, with more than four-fifths of the votes counted. His win defied the polls published the day before the election that showed that the opposition party and the ruling Fidesz party were tied, suggesting that the election will likely be very tight since Orban's return to power in 2010. The election victory will ensure that policy certainty continues and sets Orban back on the collision path with Brussels. PM Orban will be facing some budget concerns due to the record-election spending coupled with the Ukraine war, which prompted the government to cut economic growth. Furthermore, Orban will have to navigate a new EU mechanism that links funding to adherence to the rule of law and the deterioration of his relationship with his closest EU allies. 

Poland: With the data card empty at the start of the new week, the focus falls on the credit rating review by S&P on Friday. The global rating agency affirmed Poland's 'A-/A-2' foreign currency and 'A/A-1' local currency ratings with a stable outlook. The stable outlook reflects the balance between macroeconomic risks stemming from the Russia-Ukraine conflict and the buffers provided by the country's strong external and government balance sheets. The rating agency expects the fallout between Russia and Ukraine to have a sizeable effect on the Polish economy. Therefore, GDP growth projections for this year were revised lower by 1.4ppts to 3.6%. In addition, intensifying supply-side bottlenecks and high energy and other commodity prices, lower external demand from Poland's main euro area trading partners and weaker investor and consumer confidence are also weighing on growth.

Czech Republic: The S&P Global Czech Republic manufacturing PMI posted 54.7 in March, down from 56.5 in February, to signal the slowest improvement in the sector's health since November 2020. Driving the slowdown in manufacturing activity was a renewed decline in production, down for the first time since October 2021. Also, new orders fell marginally to end a four-month sequence of growth, and new orders from abroad contracted at the fastest pace since July 2020, as demand waned amid the war in Ukraine and soaring prices. The survey also flagged the loss of key export markets due to the war. Input prices rose at the fastest pace for four months and at a near-record rate. Employment continued to rise, albeit at the slowest pace since October 2021, as backlogs of work grew only fractionally. Weak demand conditions, uncertainty regarding hikes in input costs, and the war in Ukraine dampened business optimism, with the overall level of confidence at a 22-month low.

Forex: RUB consolidates near pre-war levels after strong recovery       

South Africa: The USD-ZAR continues to find its directional inspiration from broader USD moves. Accordingly, the pair is trading slightly lower this morning, although without much conviction. This may partly be a function of thinner-than-usual liquidity conditions throughout the Asian session due to a market holiday in China, although it is also consistent with the USD-ZAR's broader consolidation of late. The Moody's outlook upgrade may provide the ZAR with some tailwinds today, although this will likely be weighed against Friday's inversion of the UST yield curve (10v2) which signals global recession risk is on the rise.

Turkey: The USD-TRY remained steady at the beginning of the new month, extending its consolidation to three consecutive sessions. FX intervention by the central bank is placing a lid on the pair's gains. However, the bias in the USD-TRY remains skewed to the upside, given that the CBRT has not signalled a policy change in response to higher inflation, deepening negative real rates and cementing policy divergence with major central banks

Russia: The RUB's recent recovery against the USD ran into some resistance on Friday, with the currency consolidating between 80.00/$ and 90.00/$. The currency has found strong support in recent weeks after President Vladimir Putin demanded that non-friendly nations pay for Russian gas in RUB. Simultaneously, capital controls and market interventions have also provided the RUB with strong tailwinds, helping it to recover nearly all of its wartime losses.  

Hungary: The EUR-HUF remained in a consolidatory trend for the third consecutive session on Friday as the cautious undertone sweeps through the market ahead of the crucial general election over the weekend. The cross was pivoted above the 50-SMA (366.416) as the political uncertainty overshadowed the stronger than expected manufacturing PMI reading. Pulling back the lens, the cross recorded losses of about 1.15% last month, snapping the gains seen in the previous month. The prudent monetary policy from the NBH, alongside subsiding risk aversion which supported the HUF, underpinned the losses in the cross. However, the EUR-HUF retreat in the coming month could be limited by the hawkish bent of the US Fed and lingering geopolitical tensions.

Poland: Consolidation was the order of the day for the EUR-PLN during the first trading session of the new month on Friday. The cross continues to hover around the 50-SMA as investors assess the local economic data released and monitor developments in the Ukraine situation. The cautious undertone amongst investors also comes ahead of the key NBP MPC meeting slated for later this week which has the potential to move the markets. The increase in March CPI dialled up wagers for more rate hikes, which may provide some reprieve for the local currency.   

Czech Republic: On Friday, the EUR-CZK slid to its weakest level since the war broke out as markets took in the central bank's latest rate hike while assessing the developments in the Russia-Ukraine peace talks. The pair settled at 24.374, with more than a 1% weekly loss. Prior to the war, the strong demand for the CZK was fuelled by the central bank's aggressive rate hikes. The trend appears to be re-establishing itself after last week's rate decision. The EUR-CZK bears will now target the 24.200 mark, a break of which could see it test its February low of 24.094 in the coming sessions. 

Fixed Income: SAGB's to benefit from Moody's ratings outlook upgrade    

South Africa: From a narrative perspective, SA's ratings outlook upgrade by Moody's on Friday could support foreign interest in SAGBs at a time when stable yield is particularly difficult to come by. That First National Bank was a key recipient of foreign investment flows in March (JSE data) highlights that foreigners remain attracted to SA's yield profile, as rising SARB rates will strengthen FNB's loan profitability. Some of SA's innate strengths were also cited, with a resilient financial sector, deep domestic investor base, high external buffers, and a positive Net International Investment Position (NIIP). The mining sector's bumper performance remained the cherry on top, which Moody's expects to persist for now.

Turkey: Turkish USD-denominated bonds attracted strong demand last week, leading to a sharp bull-steepening of the yield curve as the short-end dropped relative to the long-end. Specifically, the 1-year tenor shed more than 55bps from its yield, which was far more pronounced than moves of around 35bps at the belly and long-end. With Turkey facing runaway inflation pressures, and persistent concerns over the independence and credibility of its central bank, USD-denominated bonds remain attractive relative to local-currency bonds.

Russia: As Russia avoided defauilt once more and completed another foreign-denominated bond payment last week, yields in the secondary market have fallen sharply. While this is largely due to government interventions in the bond market, there are also tentative signs that sentiment is stabilising and fears of default subsiding. At the same time, the RUB's recent recovery is easing inflationary pressures, which explains why moves at the short-end of the curve have been much more pronounced than those at the long-end. Specifically, the 1-year tenor led the charge lower last week, shedding around 270bps from its yield over the five sessions.

Hungary: Finance Minister Mihaly Varga was on the wires on Friday, reporting that new data showed that public debt dropped to 76.8% of GDP by the end of last year. Meanwhile, the ESA budget deficit was 6.8% versus the earlier projection of 7.5%. According to FinMin, the lower budget debt vindicated the government's approach to the pandemic related crisis of supportive spending rather than austerity. The quick relaunch of the economy is said to have handed Hungary an early advantage when it came to improving balance indicators. In addition, Varga noted that the government's policy of reducing Hungary's exposure to foreign debt financing while increasing the role of Hungarian households in the bond market proved to be the correct approach. Meanwhile, boosting financial reserves at the end of last year helped reduce the country's financial vulnerability before the Ukraine war broke out.

Poland: Poland's headline inflation accelerated to a 22-year high in March, reflecting the soaring global energy and food prices. Specifically, headline inflation accelerated from 8.5% y/y in February to 10.9% y/y in March, trouncing expectations of a less pronounced increase to 9.8%, a flash estimate of economists surveyed by Bloomberg. The double-digit CPI growth justifies the case for the National Bank of Poland to aggressively tighten monetary policy further at the upcoming meeting this week and pressure the government to seek additional measures to ease the burden on households. Rate hike pressures saw Polish bonds come under pressure, with the yield curve shifting higher as yields continue to increase across the curve.  

Czech Republic: CZK swap rates kicked higher along the IRS curve on Friday to extend its trend to four consecutive sessions as the central bank signalled that further interest rate hikes were looming. Before the weekend, Vice Governor Marek Mora stated that the CNB must bring down inflation with further policy tightening. Additional rate hikes will depend on fresh quarterly forecasts, which the board will review at its next policy meeting in May. Mora added that there is no ceiling for either the central bank or him. The 2v10 IRS swap spread is trading at its lowest levels on Bloomberg records, at negative 152bps. The 10v30 swap spread is also trading in negative territory of 8bps, which is off its lows of negative 40bps from August last year. This suggests that the traders are not rapidly increasing their long-term holdings of interest rate assets and require compensation for exposure to fixed-term swap rates.