Markets consolidate after Kremlin dismisses suggestions of peace-talk progress
Talking Points: Market sentiment deteriorates as Kremlin pours cold water on peace-talk optimism
South Africa: Consumer confidence, as measured by the FNB/BER consumer confidence index (CCI), fell in the first three months of the year, snapping the trend seen two quarters prior. Specifically, the index dropped from -9 in Q4 to -13 in Q1, a level last seen in Q2 2021. The drop comes despite the further reopening of the economy and a decline in COVID-19 infections. According to the BER, the decline in the index saw it erase gains that had returned it to pre-pandemic levels in the final quarter last year. Further details from the BER revealed that the decline in consumer confidence was partly driven by Russia's invasion of Ukraine, the unfolding humanitarian crisis, and the economic ramifications of the war. Looking at the sub-indices of the CCI, both the economic outlook and household financial position indices declined, dragging the overall index lower.
Turkey: In line with market expectations, the CBRT kept interest rates unchanged for the third straight month at the MPC meeting held yesterday. The policy rate was left at 14.00% despite the continued surge in consumer prices at an eye-popping pace, which has made the cost of living increasingly expensive. In a statement accompanying the rate verdict, the central bank defended their decision saying that inflation has been driven by rising energy costs resulting from the heightened regional conflict and supply-side factors affecting food prices. Moreover, the CBRT expects inflation to ease following measures it has taken to boost the economy, subsiding base effects and a resolution of the Russia-Ukraine conflict. With the course of monetary policy unlikely to change anytime soon as the CBRT shares President Erdogan's unorthodox economic view, inflation is likely to accelerate further and local assets will remain under pressure.
Russia: There has been a broad-based deterioration in market sentiment, with the catalyst for this was comments made by Kremlin spokesperson Dmitry Peskov dismissing reports of substantial progress in peace talks with Ukraine and blamed Kyiv for slowing down negotiations. However, talks between Russian and Ukrainian officials continue as the war rages on. A pattern of destructive shelling and sieges of cities drags on, as Russian troops struggle to make material progress with their invasion. According to the Pentagon's Defence Intelligence Agency, Ukraine's stiff resistance might lead to Russia brandishing threats to use biological and nuclear weapons to project strength to its internal and external audiences. The mere possibility of this could weigh on market sentiment.
Hungary: The NBH left the effective interest rate unchanged after the recent rally in the local currency eased pressure on policymakers to hike rates further. Consistent with the market expectations, the central bank kept the one-week deposit rate at 5.85%, marking the first time in four weeks rate-setters have paused rate hiking. Meanwhile, preliminary monthly data released by the NBH showed that Hungary's external position deteriorated further during the start of the new year. Specifically, the current account deficit widened from EUR622m in December to -EUR763m, its highest shortfall in three months. Details from the central bank revealed that the current account shortfall resulted from the deficit for merchandise goods and services. Partially offsetting this was the improvement in the primary and secondary income deficits. The theme of widening deficit may persist in the coming months as the rising global crude oil prices and recovering domestic demand boost inbound shipment, which will weigh on the trade balance.
Poland: Today, the data calendar is busier with February's average gross wages, employment, sold industrial production and PPI figures all out. Poland's gross wages growth remains relatively robust despite slowing in January. Wage growth is supported by the tightening of the labour market and recovering economic growth. Forecasts compiled by Bloomberg show that wages growth will rebound in February while employment will continue to grow. With wages growing faster than inflation and a tightening labour market, this will likely pose an upside risk to the inflation outlook. As such, justifying the case for the NBP to tighten monetary policy further.
Industrial production growth continues to point to an economy on the path of recovery. Factory output growth accelerated for the fourth consecutive month in January, reaching 19.20% y/y, the fastest pace of growth since May 2021. Market expectations are for output growth to have moderated in February, but remain fairly buoyant. This can be partly driven by the ongoing Russia-Ukraine war fanning global commodity prices, persistent supply-side constraints, elevated freight and input charges. Despite the expected slowdown in growth, Poland's output growth remains elevated compared to historical levels, which bodes favourably for the domestic economic outlook.
Czech Republic: The Czech Republic launched its €6bn tender to build a new reactor at the Dukovany nuclear plant as the country aims to increase its nuclear power generation. The winning bidder is expected to be selected by 2024, with a construction permit issued by 2029, PM Petr Fiala said. The landlocked country with limited wind and solar power options sees nuclear energy as necessary to give up coal and meet the EU's environmental goals. Surging electricity prices and the continent's push to become independent of Russian oil and gas have further boosted the case for the investment in new reactors.
Forex: USD stabilises as market sentiment deteriorates
South Africa: The USD-ZAR's downtrend from the multi-month highs in November gained momentum this week, with the ZAR recording strong gains on Wednesday and Thursday to reach levels last seen in October. The pair broke below the 15.0000 mark despite broadly-expected rate hikes in the US and the UK, as the market found comfort in reports of progress in Russia-Ukraine peace talks and China's promise of economic support in the face of growing risks from COVID-19 and overleveraged corporates. However, as this week draws to a close and investors face another weekend of uncertainty, the sidelines again look attractive. Investors will likely exit any short USD positions established this week and enter the weekend neutral. As a result, the USD-ZAR could stage a recovery through the trading session ahead and close the week at or back above the 15.0000 handle before it potentially nudges back below this level in a more sustained fashion next week.
Turkey: The USD-TRY continues to trade in a consolidatory channel, shrugging off the CBRT decision to keep interest rates unchanged in the face of high inflation. This steady performance confirms that the central bank is intervening in the FX market to manage the volatility. On a REER basis, the TRY is significantly undervalued by about 49%, which is justifiable given the weak macroeconomic fundamentals. As a result, the TRY has the lowest score among the twenty-two currencies tracked on the ETM's carry attractiveness model. Therefore, our view is to steer clear of this currency despite the recent steady performance.
Russia: The RUB was again unable to sustain a break through the 100/$ mark in offshore markets yesterday, paring gains through the session as it built on a consolidatory pattern. Investors are watching Russia-Ukraine peace talks and reports of foreign-currency coupon payments closely for directional inspiration into the weekend, with risks seemingly tilted to the downside given optimism that was priced in earlier in the week.
Hungary: It was an uneventful session for the EUR-HUF, which consolidated for the second consecutive day as investors assessed development on the Moscow-Kyiv talks after Kremlin poured cold water on the peace talks. The cross remained pivoted slightly above the 370 mark, which is the crucial support. Looking ahead, consolidation is likely to be the order as investors turn their attention to the NBH MPC meeting slated for next week, which holds significant market-moving potential.
Poland: The recent descent in the EUR-PLN came to a halt yesterday, with the cross snapping the three-day slide as investors continue to monitor developments on the ongoing negotiations between Russia and Ukraine. Intraday, there was a tug-of-war between the bears and bulls before the bulls emerged winners leaving the cross 0.23% above the previous close. The EUR-PLN is trading flat this morning, and heading into the weekend, we could see it consolidate given the possibility of developments in Ukraine over the weekend.
Czech Republic: Regarding the daily price movements yesterday, the CZK returned to its pre-Russian-invasion level of 24.658/EUR. However, it ended the day lower at 24.740/EUR after reports emerged that negotiating parties were far apart. Though the CZK has fared well as the war entered into its fourth week, its advance has come too quickly and risks a correction ahead of the weekend and if risk appetite deteriorates. The central bank will almost certainly intervene, but the underlying bias is turning bearish. The CZK is trading lower against the EUR as the weekend approaches. If no positive external developments occur and the currency fails to break through the 50DMA resistance at 24.658/EUR, it may conclude the week on the back foot.
Fixed Income: Russian coupon payment reportedly successful, but risks remain high
South Africa: SA bonds have gained significantly over the last week, reacting to improving risk appetite offshore and the ZAR testing its strongest levels against the USD since the end of October last year. Signs of diplomatic intent between Russia and Ukraine will be one driver, while the Fed policy meeting is now out of the way. It has been interesting to note that despite the outlook for higher US rates, the ZAR has rallied sharply this week, which would feed into the view that the currency continues to attract safe-haven flows from EM investors. In addition to the trade and current account surpluses SA is expected to produce through the next two quarters, SA's inflation rate is now lower than some of its developed market trading partners. It implies that the ZAR still enjoys some support in one of the fundamental drivers of long-term currency performance.
Turkey: Turkish bond yields look set to end the week notably higher than what they started, having come under sustained selling pressure amid persistent concerns over inflation in Turkey and external headwinds stemming from the war in Ukraine. The curve has also steepened through the week, with moves especially pronounced at the belly and long end. The short-end has remained relatively anchored, with yesterday's decision by the CBRT to keep monetary policy unchanged likely to keep downside pressures on near-dated tenors.
Russia: The cost of insuring against Russian debt default, as reflected in CDS rates, tumbled on reports that some Russian USD-denominated debt coupon payments had gone through. Technical difficulties were causing delays in payments to some creditors, but it seems as though technical default is off the table, for now. Risk of default down the line remains heightened, however, with S&P Global cutting Russia's credit score by a single notch to CC yesterday and commenting that Russia's debt "remains highly vulnurable to nonpayment".
Hungary: At a regular auction held on Thursday, total demand for Hungarian bonds arrived at HUF134.6bn prompting the AKK to sell HUF53.5bn of the securities, HUF1.5bn below the plan. Appetite was stronger for the 10yr green bond, which attracted bids of HUF59.4bn (vs HUF55.2bn a month ago), and the agency sold HUF23.0bn, generating a cover ratio of 2.58, a little changed from the 2.57 seen on February 17. The second favoured was the 7yr floating-rate bonds, attracting bids of HUF49.7bn, prompting the AKK also sell HUF15bn, raising the original offer by HUF5.0bn. Lastly, the AKK managed to sell HUF15.5bn of the discounted twelve-month T-bills, nearly halving its HUF30.0bn initial offer after demand arrived at HUF25.5bn (down from HUF30.8bn). During the non-competitive tender, the AKK sold HUF5.8bn of the floaters and HU1.7bn of the green bonds.
Poland: Poland's credit default swaps remain elevated despite coming off their recent highs. The 5yr CDS spread, which is the cost to insuring against default on Poland's dollar-denominated debt, currently sits north of 85bps which is 45.55bps higher YTD, despite the strengthening local currency. Investors continue to err on the side of caution as they see some credit risk given the high level of market uncertainty surrounding the Russia-Ukraine war, rising stagflation risks and the US Fed normalising monetary policy.
Czech Republic: CZK bond yields extended their decline to three days but have traded with a premium of 60bps from the day Russia invaded Ukraine. Meanwhile, the regional benchmark German 10yr Bund yield has risen 16bps during the same time frame to 0.382bps, the highest since November 2018. The GE 10yr yield has risen due to markets pricing in ECB rate hike bets after the Federal Reserve and the BoE raised rates by 25bps this month. Last week, the ECB said it might end asset purchases in Q3 as surging inflation more than offset concerns about Russia's shock invasion of Ukraine. The bloc's inflation is already running at record highs and is now likely to be more persistent on the back of higher commodity prices and a tight labour market.