Morning Note /

EMEA Daily: Markets anxious as Russia-Ukraine talks in focus today

  • Talking Points: SA month-end data to hold focus, Turkey shifts the tax burden

  • Forex: ZAR remains resilient, CEE currencies eyeing today’s talks

  • Fixed Income: Czech to resume sales of domestic EUR-denominated bonds

Lloyd Miller
Lloyd Miller

Head of Developed Markets and Latin America Research

Edmond Muzinda
Daron Hendricks
ETM Analytics
29 March 2022
Published byETM Analytics

Talking Points: SA month-end data to hold focus, Turkey shifts the tax burden

South Africa: Domestic events could hold market-moving potential today. First up is the release of the SARB's quarterly bulletin at 10 am SA time. This forms a deeper analysis of the GDP data, the incorporation of other key series to explain the South African macroeconomic landscape, and extrapolation and addition to various other time series. In addition, there will also be two unemployment reports, the Quarterly Labour Force Survey (QLFS) and the Quarterly Employment Statistics (QES), and a bond auction.

The labour market reports will be significant in assessing the domestic consumption outlook. Part of the SARB's narrative has been that SA's economic growth potential is improving as the economy recovers from the COVID-induced collapse in the jobs market that saw some 1.65mn fewer jobs than before the pandemic in Q3 2021. Given that the pandemic affected sectors of the economy either as a booster (in the case of Uber Eats, for instance) or as a significant depressant (tourism), the recovery will be uneven across sectors.

We will be looking for signs that the core engines of growth, such as building and industrial production, are starting to stabilize as the economy functions a little more normally. However, Q4 data will still hold the December travel ban as a core suppressant. The Q3 data showed that the construction, transport, and tourism sectors were extremely hard-hit..

Turkey: In a bid to help offset price pressures on households, President Recep Tayyip Erdogan announced VAT cuts in a number of items while raising the tax in some luxury items. According to Bloomberg, value-added tax (VAT) in staple products, including toilet paper, soap, detergent, and diapers, was reduced from 18% to 8%. VAT for purchases of homes under 150sq meters in size and medical equipment was also reduced from 18% to 8%. Meanwhile, VAT in capital gains by car dealers and sales of yachts was raised from 1% to 18%. Furthermore, the government will also reduce the financial burden on the construction sector by slashing the VAT on land property to 8%. While in the agriculture sector, President Erdogan reduced VAT to 1% on all kinds of certified seed, seedling and sapling deliveries and 8% for some products such as milk collection tanks.

Russia: S&P Global has cut its 2022 GDP forecast for Russia by more than 11% and anticipates the economy will contract by approximately 8.5%. Risks are, however, noted as to the downside given that there could still be a further escalation in the war. Russia will take a huge beating and this will affect trade linkages with the rest of the EU and surrounds. Russia's economy is also substantial, and the impact will not be contained only within Russia's borders. Strong trade linkages with the EU means those countries exposed will also take a beating, denting the growth outlook for the region just as it was exiting the pandemic and looking to be on the path to a solid recovery.

Hungary: Budapest Mayor Gergely Karacsony was on the wires yesterday saying that the upcoming general election may be extremely close despite the prediction of many polls that Prime Minister Viktor Orban’s party is tipped to emerge victorious. Karacsony believes that the decision of the six opposition parties to unite on a joint ticket placed them at an advantage, as well as their takeover of major cities. Over the years, the fractured opposition made it easier for the ruling party to win the elections. However, this alliance and rallying behind a single candidate put them in a better position to topple PM Orban’s party. Furthermore, the Budapest Mayor predicts that the April 3 ballot may be decided in about 26 of the 106 districts he considers battlegrounds.

Poland: As part of an effort to help ease liquidity stresses caused by the war in Ukraine, the ECB announced that they will launch a EUR10bn ($11bn) liquidity swap line with Poland and renew existing repo lines with Albania, North Macedonia, Hungary and San Marino. The ECB told the media that the lines are designed to prevent spillover effects in euro-area financial markets and economies that might adversely affect the smooth transmission of the central bank’s monetary policy. The backstops for central banks have been granted until January 15 next year. Furthermore, “full regard” has been given to applicable EU sanctions, with which the ECB expects its counterparties to comply so that the lines are not used to circumvent the sanctions.

The Polish financial regulators see little risk from the recent interest rate increases on borrowers’ repayment ability. With the NBP hiking interest rates by 340bps to 3.50% since October last year, there are concerns that loan repayment by borrowers might be affected. However, the Financial Stability Committee (KSF, which comprises representatives of the central bank, Finance Ministry, Financial Supervision Authority and Bank Guarantee Fund) noted that banks had ‘conservative’ lending policies and a strong labour market that helps in the repayment of loans at the higher interest rate. The regulator also told banks to remind clients to use state funds for the support of borrowers, created initially to support Swiss-franc mortgage borrowers.

Czech Republic: The Czech Republic's mortgage boom will likely stall this year. According to analysis conducted by the financial advisory platform Chytry Honza, one-third of applicants are expected not to obtain a loan. Furthermore, the study suggests that the average mortgage value fell from CZK3.5mn in Q4 to CZK3mn in January and February of 2022. This year is unlikely to build on the previous period's strong growth and is likely to return to levels before the record year 2021. Despite the increase in lending rates by the central bank, other factors such as high consumer prices, high real estate prices and an uncertain macroeconomic backdrop will weigh on the demand for mortgages.

Forex: ZAR remains resilient, CEE currencies eyeing today’s talks

South Africa: Intra-day, USD-ZAR upside momentum has dissipated along with the USD's inability to gain traction. The oil price has retreated to remove one potential risk development, while equity markets are consolidative. Industrial metals prices are well elevated to continue supporting SA's terms of trade. So, for now, the ZAR will retain a high degree of resilience despite yesterday's correction, which many would argue was long overdue. More consolidation within the broader 14.55/8000 range is anticipated for today.

Turkey: It was an uneventful start to the new week as the USD-TRY remained stuck in a consolidatory channel. Aside from the central intervention in the FX market to manage volatility, investors are also erring on the side of caution as they wait for the resumption of negotiations between Russia and Ukraine, which will begin today despite lacklustre hopes of a diplomatic solution to the conflict for the time being.

Russia: Bloomberg data show that the USD-RUB is trading just below the 96.00 mark, having pivoted near this level for the most part since the middle of the month. While Russian markets remain distorted by government interventions, it is difficult to know what the true price reflections of Russian assets are. Nevertheless, the RUB's strong recovery from the all-time lows reached on the 7th of March suggests sentiment has improved, although only tentatively so with the situation in Ukraine still highly fluid and uncertain.

Hungary: The EUR-HUF remained in a consolidatory channel at the start of the new week. Investors appear to be waiting for a strong catalyst to provide some directional momentum in the cross. Given the lack of domestic economic data, the ongoing risk-on/risk-off narrative will provide some directional guidance in the session ahead.

Despite the steady performance, bearish bets in the options market remain high as traders hedge against further losses given the risks associated with the Ukraine crisis. For the EUR-HUF, the premium of contracts to sell the unit over those to buy it in the next month sits at 3.3975%, compared to 0.3925% at the end of last year.

Poland: Friday’s pullback was not sustained during the start of the week as the EUR-PLN traded in a very narrow range. Intraday, the cross rallied by more than 1.11% before sellers joined the trend trimming the gains to 0.35%, leaving it just north of the 4.70 mark, where it has been hovering for the past two weeks. Ahead of the Euro open, the EUR-PLN is trading in a consolidative fashion as investors exercise some caution ahead of the Russia-Ukraine talks. Positive developments from the negotiations could see the cross retreat as it will ease global risk aversion. .

Czech Republic: The EUR-CZK continued to trade on the back foot yesterday, with the bears resisting a climb back above the 50DMA at 24.690. In pre-market trade, the pair is holding steady at 24.587 and could see the pair continue to resist a correction higher with the upcoming rate decision, which would further support the CZK bulls. The EUR-CZK one-week implied volatility is holding flat around the 7.63% mark, returning to levels a day before the Ukraine invasion led to a spike in the benchmark.

Fixed Income: Czech to resume sales of domestic EUR-denominated bonds

South Africa: Flattening pressure remains quite acute on the R2048-R186 spread as the front end underperforms due to various fundamental factors, including a relatively "hawkish" statement from the SARB last week. The front end of the curve is likely to be prone to lofty rate hike expectations while the long end is supported by compressing inflation and growth expectations. The spread has narrowed to 210bp against this backdrop, down from 395bp just a year ago.

FRA rates remain overpriced for the SARB guidance and stand as a marker of a market that continues to fret about US inflation risk. Domestic factors remain both inflationary and disinflationary, which should limit the SARB’s willingness to follow the Fed into significantly tighter monetary policy. The long end therefore represents a receiving opportunity with SARB likely to slow in its policy tightening into 2023..

Turkey: Turkish USD-denominated bonds kicked off the new week on the front foot yesterday, with yields slsiding across the curve. the moves were most pronounced at the front-end, entenching the steepness of the curve through to the 5yr secotr. The spread between the 2yr USD bond yield and its 5yr counterpart is currently at around 176bp, with this distorted byt eh government’s monetary policy interventions that have kept rates so low. These bonds, therefore, are deemed to be very expensive and it is unlikely that we will see short-term yields across the USD-bond curve fall much further from current levels.

Russia: Although Russian CDS spreads have narrowed in recent sessions, a 5yr tenor trading near 1500bp still reflects a notable possibility of a credit event. Russia has so far avoided a technical default, but as sanctions are tightened and the economy feels the pain of these restrictions, it will become more and more likely that a default will finally come.

Hungary: Tracking the performance of CEE peers, Hungarian bonds kicked off the week on the defensive as investors remain cautious due to the uncertainty in the Russia-Ukraine war, inflation concerns and the more hawkish signals from the US Fed. Against this backdrop, the bond yields rose across the curve, with a more pronounced jump seen in the belly and long end of the curve. The 5yr and 10yr tenors drifted higher by more than 11bps and 9bps, respectively. At the front, the 2yr tenor’s yield increased by about 8bps to 6.629%. Given the yield increases, the 10v2 spread has remained in negative territory for almost a month.

Poland: The start of the new week saw Polish bonds track the performance of their regional peers, which remained under pressure given the global inflation concerns and the lingering geopolitical tensions amid the Russia-Ukraine war. The market is also pricing in the changes in the fiscal policy announced by the government last week, which could boost inflationary pressure. Tenors across the curve saw yields continue to drift higher to reach multi-year highs, with a significant increase recorded for the 5yr POLGB, which climbed more than 9bps to 5.8532%. Meanwhile, the 2yr and 10yr POLGB yields rose more than 7bps apiece.

With inflation risks still tilted to the upside, given the elevated energy and food prices fanned by the fallout between Russia and Ukraine, rate hike risks remain entrenched as the central bank seeks to anchor these inflation expectations. The local FRA market is being paid higher and aggressively pricing rate hikes expectations. Near-term FRAs, such as the 1x4, sees a rate hike possibility of more than 86bps, while the 3x6 FRA, which will deliver from June, sees more than 147bps in possible rate hikes. At the long end, the 12x15 FRA, which covers the period from February next year, is pricing in more than 156bps rate hikes

Czech Republic: Traders' expectations of the magnitude of Czech interest-rate increases have doubled from a week ago after two central bankers opposed selling foreign reserves as an additional monetary policy tool. The FRA market has shown investors’ expectations for at least 100bps of hikes over the next three months, twice the amount implied as recently as March 21. The market is positioned for at least 50bps of tightening at the policy meeting on Thursday. Last week, Vice Governor Marek Mora and board member Tomas Holub voiced their reservations against Governor Jiri Rusnok’s suggestion that the central bank might consider buying the koruna in the market to help fight high inflation.

The Czech Republic is resuming the sales of domestic euro-denominated bonds to help repay maturing international debt and take advantage of much lower borrowing costs than in the local currency. The government seeks to issue as much as €100mn of new two-year debt on April 20, the first such sale since August, according to the Finance Ministry’s auction scheduled for next month, published yesterday. It will also offer up to CZK19bn of domestic notes, with a vast majority coming due in less than four years. One of the highest inflation rates in the European Union and the Czech central bank’s aggressive monetary-policy tightening have sent the yields on koruna-denominated bonds surging to the highest level in more than a decade. The new fiscally conservative government has pledged to help curb consumer price growth by reducing the record pandemic-era budget deficits of the previous administration.