Markets awaiting fresh US, European sanctions on Russia
Talking Points: SA moves closer to opening up completely with end to national state of disaster
South Africa: South Africa received more good news last night when President Cyril Ramaphosa declared an end to the national state of disaster, which was brought into effect two years ago to manage the COVID-19 pandemic. With this announcement, the country has entered a new phase in the pandemic where the government will step back and allow individuals to take responsibility for their own wellbeing. There will be a transitional period of 30 days in which some restrictions will remain, but for the most part, SA is inching its way towards opening up completely. This will boost business confidence at the margin and bring some relief to an economy struggling with strong growth headwinds. In the words of the president: “the end of the state of disaster is a firm commitment to rebuild our economy even while the coronavirus exists among us.”
Turkey: Data released yesterday showed that Turkey’s consumer price inflation accelerated for the eighteenth successive month, coming in at 61.14% y/y in March compared with 54.44% y/y in February. The latest CPI print missed consensus expectations of a more pronounced jump to 61.50% estimated by economists surveyed by Bloomberg, but still came in at a record high. Meanwhile, m/m, consumer prices increased from 4.81% in February to 5.46%, reflecting the impact of supply-side disruptions, a weaker lira and rising global commodity and food prices. With the risk to the inflation outlook still skewed to the upside and the CBRT reluctant to change the course of its monetary policy, inflation is likely to continue edging higher and real rates sinking deeper into the negative.
Russia: Russia has denied any accusations related to the murder of civilians in Ukraine and said it would present "empirical evidence" to a meeting of the United Nations Security Council on Tuesday proving its forces were not involved. Whether this will be sufficient to stop further US and European sanctions, however, is unlikely, with Western nations set on punishing Russia for its invasion of Ukraine. Speculation over what these sanctions will contain is currently driving global markets, and will likely continue to in the near term.
Hungary: The final election results showed that Prime Minister Viktor Orban cruised to a landslide victory after Fidesz won 53% of the votes compared to 35% of the opposition coalition. The international mission of observers (Organisation for Security and Cooperation in Europe, OSCE) noted that the election process was well run and competitive. However, the election process was marred by the absence of a level playing field, citing deficiencies that included the way in which the media landscape was slanted towards the ruling Fidesz party and a lack of transparency in campaign financing. While Orban’s victory will ensure policy continuation, local analysts warned that it threatens to erode democracy further.
Poland: Prime Minister Mateusz Morawiecki accused Germany of being the “main roadblock” in an attempt to ban the imports of Russian gas. In an apparent appeal to Chancellor Olaf Scholz, PM Morawiecki said that “it is the voice of all the innocent women and children, the voice of murdered people who should be heard by the German people and by all German politicians and not that of German businessmen and billionaires.” Despite the appeal, Germany is unlikely to make any comprise at present. Speaking over the weekend, German Energy Minister Habeck said that Berlin would strive to become independent of Russian energy imports but “not immediately” as an embargo would lead to shortages next winter that would damage its economy.
Czech Republic: According to a report published on the central bank's website outlining last month’s financial market inflation expectations, the one-year horizon inflation estimate has risen significantly to 4.5% due to the sharp rise in energy and commodity prices. However, over the three-year horizon, they remain unchanged, slightly above the central bank's 2% target rate. The analysts noted that cost-push inflation pressures would persist through energy, fuel, and food prices in the months ahead. However, their effect will be reduced by demand effects, which will weaken due to the adverse effects of the Russian invasion on the Czech economy. According to the analysts, however, core inflation will probably be high, as firms will have to pass on at least part of the growth in their energy and commodity costs to their customers through end prices. There is speculation that annual inflation could be as high as around 10% in 2022 as the risks remain primarily skewed to the upside due to the unusually high degree of uncertainty.
Forex: CEE currencies a mixed bag, while ZAR continues to find support in rising commodities
South Africa: The end of the state of disaster in SA may lend the ZAR additional support in the sessions ahead and add impetus to its bullish start to the week. Note that it gained around 0.50% on Monday to break back below the 14.6000/$ mark, and this against a broadly stronger USD. These market dynamics can be explained by recent developments in Ukraine, where alleged civilian killings by Russian troops have triggered talks of more US and European sanctions on Moscow. In turn, this has supported industrial metals prices, with the ZAR a beneficiary of this as investors continue to trade it as a proxy for commodity exposure. For now, the ZAR retains a resilient undertone and has held its own against a firmer USD. It has traded with a bullish tilt overnight, securing its break through R14.6000/$ yesterday.
Turkey: It was another uneventful session for the USD-TRY as it remains in a consolidatory trend. Notwithstanding the steady performance, the bias in the pair is tilted to the upside on the back of high inflation, broad-based dollar strength, negative real rates, political uncertainty and a widening trade deficit which bodes unfavourably for the current account. Given the underlying weak macroeconomics dynamics, it is advisable for investors to steer clear of the Turkish lira.
Russia: The RUB continued to consolidate around the 84.00/$ mark in offshore markets at the start of the week, as investors weigh the prospect of new Western sanctions on Moscow against peace talks between Russia and Ukraine. The currency will likely continue to consolidate in the near term, with capital control measures being implemented also keeping it stable for now. It will thus not reflect true uncertainty and concern in the market, with risks tilted toward depreciation once capital control measures are eventually eased.
Hungary: The EUR-HUF snapped out of the consolidatory channel yesterday after rallying as the landslide victory by PM Viktor Orban spooked traders. Investors may be worried about the government’s next steps, with some flagging concerns over economic growth, inflation and the country lagging behind the rest of the EU in terms of democratic standards. As such, the cross firmed by about 0.50% and closed the day at 368.85, its best performance in five sessions. With the elections in the rearview, the market will turn attention to geopolitics and local data releases for further directional guidance.
Poland: CEE currencies were a mixed bag at the start of the new week, with the PLN and CZK on the offensive while the HUF traded on the backfoot. The EUR-PLN extended its slide for the second successive session, snapping out of the tight range previously seen. The cross pulled back by about 0.39%, reaching 4.6199, its lowest level in more than a month. Dialled up speculation for more rate hikes and a weaker EUR against the USD appear to have underpinned the slide in the cross. With the EUR-PLN breaching below the 100-SMA, there is the potential to retreat further in the session ahead.
Czech Republic: The EUR-CZK fell on Monday to retest its pre-Ukraine conflict lows of 24.300, putting the important 24.200 support in the crosshairs in the coming sessions. The pair has fallen for eight consecutive sessions, during which it has lost more than 1.7%. Notably, there is still more room to the downside. However, traders should remain mindful of volatility, as the one-month EUR-CZK implied vol benchmark has spiked at the start of the new month, trading above the 7.450 mark.
Fixed Income: US ratchets up pressure on Russia by stopping bond payments with reserves at American banks
South Africa: With R186 outperforming, the R2048-R186 spread has risen to 241bp from levels closer to 210bp in the recent past. The market seems to be going through a consolidation phase, with macroeconomic fundamentals favouring flattening still. R186 outperformance suggests foreign interest might be picking up, and could continue given the favourable Moody's review over the weekend. Meanwhile, compression in FRA rates continues amid ZAR stability and improving offshore risk appetite. The 21x24 FRA is now pricing in 244bp worth of rate hikes, which remains too high when considering the SARB’s guidance. The 5x8, which hedges rates into the end of the year, is pricing in just over 100bp worth of rate hikes, and this compares with a QPM preference for roughly 75bp.
Turkey: Turkish USD-denominated bonds at the short-end of the curve attracted very strong demand on Monday, with yields falling around 10bps-12bps through the session as investors digested sky-high CPI numbers. Turkish bonds offer extremely high yields to international investors to account for market distrust of the Erdogan-administration’s policymaking and general uncertainty. This has helped the Turkish bond market attract strong demand recently, especially for short-end tenors.
Russia: The US has 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. Recall that although previous sanctions froze the CBR’s currency reserves at US financial institutions, the Treasury had been allowing the Russian government to use those funds to make coupon payments on dollar-denominated sovereign debt on a case-by-case basis. As of yesterday, this is no longer the case. Note that CDS rates do not yet reflect a higher risk of Russian default, although this may be priced in today and through the week ahead.
Hungary: Hungary’s Debt Management Agency issued a statement that revealed that the country has completed 21% of its full-year FX financing plan in the first three months of this year and has “significant manoeuvring room” for further net foreign-currency issuance. However, further FX issuance will be subject to market conditions.
Poland: Poland’s planned personal income tax changes (PIT) are likely to drive the country’s deficit higher. Deputy Finance Minister Artur Sobon told local radio that the government will proceed with the tax reforms as it needs to finance economic growth and maintain the current growth rate despite inflation and unfavourable phenomena. Poland expects to shoulder PLN15bn in annual costs of the proposed PIT changes, such as cutting the PIT rate to 12% from 17% as of July 1 and abolishing the middle-class tax relief. Sobon noted that Poland has room for such a tax reform since the nation’s general government deficit last year proved visibly lower than initially expected, providing some room to manoeuvre.
Czech Republic: A payer's bias persisted along the IRS curve at the start of the week, with swap rates rising by 5bps to 10bps. The curve shifted higher, with the 2v10 swap spread deeply inverted at -151bps. The market is focusing on domestic fundamentals as it prepares for the March CPI print due next week, following an 11.1% y/y increase in February, which does not include the energy shock from the war. Investors are pencilling in more rate hikes as they try to reconcile the CNB’s aggressive rate hikes with geopolitical risks in the aftermath of Russia’s invasion of Ukraine. The longer the conflict persists, the more serious the interest rate hike risk becomes.