Morning Note /

EMEA Daily: Prospect of tighter financing conditions saps global risk appetite

  • Turkey changes reserve-requirement rules as price pressures continue to mount

  • Russian yields fall as investors position for CBR rate cuts

  • No reprieve for battered ZAR as risk appetite fades

Danny Greeff
Danny Greeff

Financial Market Analyst

Daron Hendricks
Daron Hendricks

Financial Market Analyst

ETM Analytics
25 April 2022
Published byETM Analytics

Prospect of tighter financing conditions despite slower growth saps global risk appetite

Talking Points: Turkey changes reserve-requirement rules as price pressures continue to mount  

Global: The week ahead has some key data releases scheduled out of the US with the first readings for Q1 GDP and the latest PCE core numbers out. The GDP data will give some insight into the impact of the Russia-Ukraine war and the surge in inflation that it has caused, although we could see some underlying resilience present which will be supportive of the policy hawks. The PCE figures, meanwhile, may provide the Fed with further confirmation that it is on the right track in moving to hike interest rates so aggressively, even if they remain behind the curve and are now needing to catch up to bring inflation back under control. 

South Africa: Several key data releases are scheduled in the week ahead, both onshore and offshore, that will impact the market. Onshore, a leading indicator for February, the March releases of PPI inflation, private sector credit extension and money supply, the government budget balance, and trade will hold focus. The data will be considered against new stressors, including the KZN floods, Eskom's inability to maintain adequate power production, and rising concern over a Chinese economic slowdown that could sap demand for SA's commodity exports. The domestic data card will hold significance in assessing key themes in SA. These include inflation risk through PPI and money supply/PSCE, the growth outlook through the leading indicator, the degree to which the government keeps expenditures contained through the fiscal accounts, and the fundamentals underlying the ZAR through the trade balance.

Turkey: Over the weekend, the CBRT announced revisions to reserve requirement rules for banks in Turkey, marking an effort to keep loan growth in check and encourage conversion of foreign currency into the TRY. The monetary authority said banks' local currency-denominated commercial cash lending -- excluding that which involves small and medium-sized enterprises, and export and agricultural loans -- would be subject to reserve requirements. It also raised reserve requirements for personal accounts at lenders that did not meet the target of converting foreign currency-denominated accounts into lira. It seems that the central bank is leaning more heavily on policies that could bring in more hard currency and boost its reserves than it is on traditional interest-rate hikes to curb inflation.

Russia: The EU's top diplomat, Josep Borrell, was quoted as saying that there is insufficient support from European Union member states for a complete embargo or punitive tariff on Russian oil and gas imports. Oil exports are the Kremlin's main source of foreign currency and many within the EU have called for an end to oil payments because they effectively finance the war in Ukraine. Some EU countries are pushing for a sixth sanctions package on Russia and Brussels is preparing a full impact assessment of an oil ban as part of possible further measures. Borrell reportedly said the topic would be discussed at the next EU summit due at the end of next month and that he did not expect any decision on the matter before then.

Hungary: Data published overnight showed that economic sentiment in Hungary rebounded in April after tanking in March as Russia's invasion of Ukraine sent tremors across the region. Economic sentiment rose from -5.5 in March to a more than two year high of 2.6 in April. Note that both business and consumer sentiment improved this month. While the sentiment gauges rebounded smartly this month, pessimism about the future of the economy remains elevated. The improvement in economic sentiment should bode well for domestic assets at the start of the new week. 

Poland: PM Morawiecki held a news conference on Friday where he stated that the government would slash personal income tax to 12% from 17% to help compensate consumers for the surge in inflation. The tax cuts will be in effect from the start of July and we will also see the middle-class tax break scrapped in a continued overhaul of the botched tax reforms seen at the start of the year. The reduction in taxes, however, suggests that elevated inflation levels may persist as consumers will receive more disposable income.

Czech Republic: According to data published by Eurostat on Friday, the Czech Republic's debt grew by 4.2% to 41.9% of GDP last year amid covid-19 support measures. Given that the nation was one of the worst-hit countries in the European Union by the pandemic, it reported the sharpest growth in debt compared to its relative counterparts. Nonetheless, the Czech Republic maintains one of the lowest debt levels in the EU. In terms of the budget deficit, the Czech ranked among the countries with an above-average deficit, which rose to 5.9% of GDP vs 5.8% in 2020, Eurostat reported.

Fixed Income: Russian yields fall as investors position for CBR rate cuts      

South Africa: Yields have ratcheted higher amid a deterioration in market sentiment, downside pressure on commodity prices, appreciably sharp ZAR weakness last week, and as the market considers the prospect of a heavy hand at the Fed in a bid to nip inflation risk in the bud. The long end has been underperforming due to higher uncertainty and time premiums. The outlook heading into the session today remains bearish amid a significant underperformance of risk assets in the Asian session.

Turkey: Turkish local-currency bonds performed well last week, with yields falling across the curve over the five sessions despite broader fears of tightening global financing conditions to curb mounting price pressures. This stands to reason, as the CBRT has continuously signalled that it would not hike interest rates in Turkey despite runaway inflation, although it has used other measures to try and halt price pressures, generally centred around currency controls. The broader trend for Turkish yields also remains to the downside, although this may begin to look somewhat stretched as other major central banks hike rates in the months ahead.

Russia: Russian bonds attracted some strong demand last week, as inflationary pressures have shown signs of easing, supporting the argument for rate cuts in the months ahead. Consistent with this, moves have been especially pronounced at the short end of the Russian yield curve, leading to a notable steepening thereof recently. More of the same is expected in the week ahead, with the CBR set to cut the benchmark interest rate sharply on Friday.  

Hungary: While FRAs consolidated in the latter part of last week after the NBH left its key interest rate unchanged for a fourth straight week, the broader bias remains firmly to the upside. The broader payer bias is underpinned by mounting inflation risks, which are being amplified by the ongoing war in Ukraine. Although the HUF has stabilised, easing pressure on the central bank to turn even more hawkish, spiralling inflation and higher rates in key trading partner nations are expected to prompt additional rate increases in the months ahead.

Poland: The central bank mopped up PLN170.7bn in excess banking sector liquidity on Friday. This was slightly below the PLN173.9bn swept up compared to Friday the week prior. Nevertheless, the amounts taken out of the system remain elevated, suggesting that liquidity levels are still flush. Meanwhile, the central bank also noted on Friday that it will not be reinvesting the proceeds from 7.3bn PLN worth of maturing government bonds it will receive today. This provides some consistency in the bank's push against inflation, as it is another step in tightening up monetary policy. The bank, however, has left the door open to it possibly resuming its bond-buying in the near future, although we don't see that happening this year.

Czech Republic: Battered Czech bonds continued to lose ground on Friday, closing the week on the back foot and are set to end April with yet another monthly selloff due to rising inflation, interest rate-hike risks and the ongoing Russia-Ukraine war. So far this month, CZK bond yields have risen just shy of 60bps, albeit less than its peers Poland and Hungary, up 70bps and 100bps, respectively. Note that the CZK yield curve is trading at a premium of 120bps over the PLN sovereign bond curve and more than 250bps on the HUF yield curve, based on the respective benchmark tenors.

Forex: No reprieve for battered ZAR as risk appetite fades

South Africa: In just one week, more than half of the ZAR's spectacular first-quarter advance was wiped out. Depreciating around 6.70% against the USD last week, the ZAR recorded its worst weekly performance since the early days of the COVID-19 pandemic. The local unit was hit by a perfect storm, with domestic issues such as stage-four load-shedding, the Kwa-Zulu Natal floods, rising COVID-19 infections, and potentially Barclays' sale of Absa exacerbating external headwinds in the form of global growth concerns and the prospect of extremely aggressive monetary tightening by the likes of the Fed. As the market adjusted for these factors and broke out of its broader trading range, some stops were triggered, which added impetus to the selloff. Heading into the new week, there is little to suggest that a USD-ZAR turnaround is imminent. The pair has risen to a three-month high of 15.6900 overnight, extending last week's move as risk aversion across the globe has ramped up.

Turkey: The USD-TRY remained in a consolidatory channel last week, drifting only slightly higher towards 14.7500. This steady performance comes on the back of the Turkish government taking fresh steps to bolster foreign exchange reserves by requiring hard currency earned by services sector firms to be exchanged with the central bank. Also, the CBRT increased the rate at which exporters must convert their forex revenue into lira to 40% from 25%. Despite the steady performance, the bias in the pair is skewed to the upside amid the underlying weak macroeconomic fundamentals and the more hawkish signals from the Fed, buoying the greenback and driving UST yields higher.

Russia: For a second time in a week, the RUB rallied beyond 73.00/$ on Friday, but was unable to sustain these gains and ultimately closed slightly weaker around 75.00/$. While capital controls and energy exports have supported the RUB in recent weeks, it has found extra bullish impetus at the end of the month from currency conversions for tax payments. Whether this can be sustained, however, remains to be seen, especially since the CBR may well decide to cut the benchmark interest rate later this week to support the economy.

Hungary: While the HUF ended Friday's session in the red against the EUR, the local currency still managed to end the week in the green. For context, the HUF appreciated by 1.1% against the EUR last week, marking a second successive weekly gain. It continues to find support in improving carry appeal after the central bank's recent rate hikes. That being said, the HUF is highly sensitive to the war in Ukraine, which has come as a stern headwind to the currency.

Poland: The EUR-PLN remains rangebound, trading between the 50DMA above at 4.6746 and the 100DMA below at 4.6241. The cross is expected to remain within this trading range over the near term, not moving too far away from the 4.64000 level. The cross awaits a new catalyst, leaving the global risk narrative to drive direction for now. The risk-off conditions suggest that the cross should remain near the upper bound of this recent trading range for the time being.

Czech Republic: The EUR-CZK's bearish bias persisted into the weekend, with the pair testing the 24.300 support, a level last touched at the beginning of the month and remaining near levels seen before Russia invaded Ukraine in late February. Though investors in central Europe remain cautious with the ongoing fighting in Ukraine, currencies in the region have steadied after drops in March, buoyed by the potential of rising interest rates as inflation continues to soar to highs not seen in decades. However, with the CZK more than 17% overvalued on a trade-weighted basis, the most it has been in two decades, the local currency is vulnerable to the external environment and unlikely to return to its 2022 high of 24.100 in the short term.