Morning Note /

EMEA Daily: Market sentiment mixed as Fed's Powell signals 50bp hike possible

  • EU foreign ministers unable to reach consensus on Russian oil embargo

  • ZAR remains stable as the spotlight shifts to the SARB

  • Russian secondary OFZ market reopens with yields rising sharply across the curve

Danny Greeff
Danny Greeff

Financial Market Analyst

Edmond Muzinda
Daron Hendricks
Takudzwa Ndawona
ETM Analytics
22 March 2022
Published by

Market sentiment mixed after Fed Chair Powell signals 50bp hike possible 

Talking Points: EU foreign ministers unable to reach consensus on Russian oil embargo    

South Africa: Following the long weekend, investors will be greeted by the SARB leading indicator for January. The SARB leading indicator continues to point towards an economy that is on a recovery path despite the index falling slightly to 126.20 in the final month of 2021. However, episodes of a stalling recovery are inevitable going forward, given the lingering idiosyncratic factors that continue to pose downside risks. Among others, the resumption of load shedding disrupting productive sectors of the economy, sky-high unemployment levels, weak domestic demand, insufficient capital investments and continued political tension will continue to detract from economic activity. Meanwhile, the unfavourable external conditions due to the ongoing geopolitical tension, exacerbating supply-side challenges, and rising global crude oil prices add another layer of concern to the economy. We may, therefore, see the index continue to edge lower over the coming months.

Turkey: Speaking at a business forum, Treasury and Finance Minister Nureddin Nebati said that the Turkish economy is growing in a balanced manner, citing exports, domestic consumption and factory activity that are rising at the same time. The improvement in the above-mentioned areas can be attributed to the government's new approach dubbed Turkey Economy Model, which priorities supporting economic growth through targeting increasing exports, creating employment and current account surplus while keeping the interest rate low. Commenting on price growth, FinMin Nebati reiterated that the global rise in energy prices has been accelerating inflation in Turkey, but Ankara would continue working to lower it.

Russia: EU Foreign Ministers were not able to reach consensus on a potential Russian energy embargo, with some members maintaining that this would amount to an own goal given the bloc's dependence on Russian oil and gas. However, the bloc is considering new sanctions on Moscow, as Russia's invasion of Ukraine rages on. On that front, note that Ukraine's military warned citizens to brace for more indiscriminate Russian shelling of critical infrastructure, while US President Biden issued one of his strongest warnings yet that Moscow may be considering using chemical weapons.

In other news, a Moscow court found Meta guilty of "extremist activity", but the ruling will not affect its WhatsApp messenger service, focussing on the US firm's already-banned Facebook and Instagram social networks. Russia's communications regulator Roskomnadzor said it would exclude Meta from the list of foreign entities operating on the internet in Russia, and Instagram and Facebook from the register of social networks. Additionally, Roskomnadzor said that Russian media must label Meta and its social networks as prohibited when distributing information and are forbidden to display their logos.

Hungary: Investors will have the NBH MPC meeting on tap today, where they will get an update of the base rate and insight into the central bank's forward guidance. The central bank is expected to continue hiking interest rates to stem inflation and support the local currency that has sold off amid the increased market volatility. The risk of inflation skewed to the upside and expectations of consumer price inflation to decline later than expected underscore the need for the NBH to continue tightening monetary policy. The central bank will also be looking to mitigate second-round inflation risks.

Poland: Poland's main opposition thwarted the government's plan to change the constitution to allow the state to seize Russian assets and to exclude defence spending from the country's debt brake. Opposition leaders who spoke to the media said that the three-point plan to put pressure on Russia lacked clarity. Given the ruling coalition's thin majority in the lower house, their votes fell short of the two-thirds needed to change the constitution. Opposition parties also criticised the government for its failure to block imports of Russian coal and its plans to sell parts of the Gdansk-based refiner Grupa Lotos SA to Hungary's Mol Nyrt.

Czech Republic: Central banks anticipate a period of great uncertainty due to the events in Ukraine, which will exacerbate inflationary pressures and negatively impact economic activity. In the coming months, central banks will face the challenge of determining the optimal rate of monetary policy normalisation in the face of another negative supply shock. Although the effects of the war have not yet been reflected in most central banks' measures and forecasts, the Czech National Bank and the National Bank of Poland have begun intervening in the foreign exchange market. Major central banks, including the Fed and the ECB, have been hesitant to raise interest rates but are beginning to move in that direction, following the Fed's 25bps rate hike last week. The Czech Republic is facing one of the EU's most intense inflation episodes even after the central bank raised its benchmark borrowing costs by a cumulative 425bps since June last year. With the key rate at 4.5%, policymakers have signalled that room for further rate hikes is limited. 

Forex: ZAR remains stable as the spotlight shifts to the SARB     

South Africa: The USD-ZAR remains relatively rangebound, sticking below the 15.0000 handle despite some marginal topside pressure this morning. Although Powell's comments and the consequent rise in US Treasury yields might restrict ZAR appreciation in the short term, it is not obvious that they will spark a sharp bout of ZAR depreciation that might break the ZAR's broader bullish trend. The USD-ZAR thus looks set to continue testing recent lows between 14.8500-14.9000, especially if the SARB's forward guidance turns more hawkish later this week.

Turkey: It was an uneventful session for the USD-TRY yesterday, with the pair trading flat and halting the rally seen in the previous session. The muted response from the pair could be a result of the central bank intervening in the FX market to limit market volatility. Investors are also exercising some caution as they assess development on the ongoing talks between Russia and Ukraine. Given the absence of the local economic data, the market will continue to pay attention to external developments for further directional guidance.

Russia: The USD-RUB has steadied around 105.0000 at the start of the week, as market digested news that Russian foreign-denominated bond payments were being serviced successfully. Furthermore, the EU's inability to agree on a Russian oil embargo also supported sentiment towards the RUB at the margin, as Russia will continue to enjoy oil-export revenues. Despite the RUB's relative stability at the start of the week, it remains vulnerable to sharp intraday volatility as bid-ask spreads are extremely wide given the thin liquidity conditions it is trading in. Until the war in Ukraine comes to an end, the RUB will remain at risk of a further selloff, and thus not likely stage a material recovery.

Hungary: The EUR-HUF bears took charge during the first session of the new week bringing to a halt the rally seen on Friday. The cross lost about 0.46%, with further retreat limited by cautious undertone in the market due to the uncertainty in markets over the Russia-Ukraine situation. Investors were also erring on the side of caution as they await the NBH rate verdict slated for later today. A hawkish move by the central bank could offer more downside impetus in the cross.

Poland: It was a downbeat session for the EUR-PLN, snapping the rally seen last Friday. The cross slipped by about 0.47% to continue hovering around the 4.70 mark. The retreat in the cross is unlikely to be sustained given the mixed market sentiment with respect to the war developments in Ukraine that continue to dominate the market focus. Looking at risk reversals for the EUR-PLN, the premium of contracts to sell the local unit over those to buy it in the next three months, are still elevated compared to levels seen at the start of this year. The 3-month 25D risk reversal currently sits at 3.58 EUR calls, the highest in the region, compared to 0.71 EUR calls on December 31. This suggests that the options traders are still very bearish on the PLN  and we expect them to remain so until we see positive developments on the war front.

Czech Republic: The CZK gained yesterday off the back of the Governor's comments that the Czech central bank would continue to intervene in the spot market to strengthen the currency in a bid to cool inflation. After encountering strong resistance from the 50DMA at 24.667/EUR, the local currency closed at 24.709/EUR. Nonetheless, the CZK has gained almost 3% against the EUR this month, placing it among the top four emerging market currencies out of twenty-four tracked by Bloomberg. The CZK has strengthened slightly in pre-market trade this morning but moves beyond the resistance level appear limited unless the CNB intervenes in the market in the coming sessions. Note that the EUR-CZK stochastics are about to issue a crossover buy signal.

Fixed Income: Russian secondary OFZ market reopens with yields rising sharply across the curve 

South Africa: With the Fed looking at a further 150bp worth of tightening this year, the SARB now looks a little more likely to step on the brakes, despite low domestic growth potential. This favours SAGBs, which have among the highest yields in EM, a very steep term premium on the policy rate, and remain liquid. The market remains poised for an aggressive policy tightening cycle with just under 200bp expected by year-end. This remains within the realms of possibility when considering Fed guidance but remains a significant risk to the fragile SA economy.

Turkey: Turkish USD-denominated bonds started the new week off on the defensive, with yields rising slightly across the curve through the session as investors digested the prospect of rapidly tightening financing conditions across the globe following very hawkish comments by Fed Chairman Powell. Yesterday's move was consistent with the market's broader trend, which has seen the Turkish USD yield curve rise sharply over the last three weeks.

Russia: Marking the second time in a week that Russia appears to have averted default on its foreign-denominated bonds, coupon payments on a sovereign bond maturing in 2029 were reportedly processed without a hitch by banks yesterday. Credit default swaps rates remain elevated, however, as investors still anticipate payment complications in the coming weeks and months that could lead to a technical default. Also note that Russia's secondary bond market reopened for trade yesterday, with yields rising sharply across the curve as investors played catch-up to recent developments in Ukraine and consequent CBR rate hikes.

Hungary: On Thursday, the AKK will return to the market, offering to sell HUF45bn worth of bonds maturing in 2028, 2032 and 2041. Demand for local debt is likely to be supported by the higher yields on offer. However, the lingering geopolitical risks and elevated inflation concerns could weigh on demand for domestic debt. 

In the secondary market, Hungarian bonds kicked off the new week on the defensive on the back of fresh geopolitical tensions in the Middle East, a lack of progress on Russia-Ukraine talks and rising UST yields. A notable increase in yield was seen at the long end of the curve, with the 10yr tenor jumping more than 21bps to reach 5.9776%. At the front, the 2yr tenor climbed more than 14bps.

Poland: Polish bonds returned on the backfoot at the start of the week as rising global crude oil prices entrench inflation concerns and stoke bets that the central bank will continue hiking interest rates. The most notable yield increase was seen at the front end of the curve, with the 2yr tenor jumping more than 24bps, followed by the 5yr tenor, which was up more than 20bps. Lastly, the 10yr tenor's yield drifted higher by more than 19bps.

Czech Republic: The new week began with a rise in CZK bond yields, following a week of declines. This was consistent with the broader bond selloff, with the German 10yr Bund yield rising to 0.4% (a level not seen since November 2018) and the 10yr US Treasury bond yield also rising. Investors are weighing the tightening cycles of central banks, with Fed Chair Jerome Powell signalling faster hikes than necessary to combat inflationary pressures. The likelihood of the ECB raising interest rates this year is also increasing. Money markets are now pricing two 25bps rate hikes by the ECB in 2022, compared with smaller than one such increase at the start of the month. Inflation in the Eurozone is already at record levels, and it is expected to become more persistent due to higher commodity prices and a tight labour market. Meanwhile, traders are keeping an eye on talks between Russia and Ukraine about a possible ceasefire.