Morning Note /

EMEA Daily: Reported progress in Russia-Ukraine talks weighed against Fed today

  • Market sentiment improves on optimistic feedback from Russia-Ukraine talks

  • CEE currencies rise on hopes for de-escalation of conflict in Ukraine

  • The spotlight is on Fed rates lift-off today, with 25bp hike expected

Danny Greeff
Danny Greeff

Financial Market Analyst

Daron Hendricks
Edmond Muzinda
Takudzwa Ndawona
ETM Analytics
16 March 2022
Published byETM Analytics

Reported progress in Russia-Ukraine talks weighed against Fed policy today

Talking Points: Market sentiment improves on optimistic feedback from Russia-Ukraine talks

South Africa: For SA, what will be important in the weeks ahead is whether commodity prices remain elevated after the war or not. Given the disruptions to mining operations and energy supplies, it is possible that they do, at a time when risk appetite has recovered. That could allow for a cocktail to encourage foreigners back into EMs, especially SA. It could prove to be a catalyst for another appreciative surge in the ZAR. However, should commodity prices retreat quickly to levels below those seen before the war, the ZAR will lose its terms of trade advantage. Focus will therefore remain on a combination of the FOMC decision by the Fed and the ongoing negotiations between Russia and Ukraine.

Turkey: Turkey's fiscal dynamics improved for the second consecutive month as the budget balance surplus widened from TRY30bn in January to TRY69.7bn, the highest level on record since Bloomberg started tracking the time series. This compares to a TRY23.2bn surplus in the same month a year earlier. The notable improvement comes on the back of a dividend payment from the central bank, which exceeded government spending on national gas imports. Information from the Turkish Ministry of Finance showed that total revenue rose 126% from a year earlier to TRY270.6bn while expenditure excluding interest payments rose 87.9% to TRY157.1bn. However, with Turkey facing an economic crisis, coupled with a high energy import bill and the government scheme to support the lira, the country's fiscus is likely to come under pressure in the months ahead.

Russia: There has been more positive feedback concerning ongoing negotiations towards a resolution, with Ukraine signalling it may be prepared to compromise its plans for NATO membership in a bid to encourage Russia to end the war. This is the first sign of progress in achieving a lasting settlement that will allow Ukraine to recover and ease geopolitical tensions more broadly. Note, however, that a big gap remains that still needs to be bridged, notwithstanding Ukraine's compromise. This is best captured in comments recently made by Russian President Putin, who said that Ukraine's leadership was not "serious" about resolving the conflict.

Hungary: Following the long weekend, investors will be greeted by the consumer confidence statistics released overnight. Consumer sentiment snapped the trend seen three months prior after falling to -28 in March, the lowest level in a year. This compares with -17  that was seen in February. The notable drop could be attributed to the high inflation, which is eroding the purchasing power of households and the ongoing geopolitical crisis. The subdued consumer confidence bodes unfavourably for the domestic economic outlook.  

Poland: Data released yesterday showed that Poland's headline inflation slowed for the first time in eight months, reflecting the impact of the government's anti-inflation measures. Specifically, consumer price inflation decelerated from an upwardly revised multi-year high of 9.4% y/y in January (prior: 9.2%) to 8.5% y/y in February. This latest CPI print missed market expectations of a more pronounced drop to 8.3%, a median estimate of analysts surveyed by Bloomberg. Although price growth has moderated, it remains elevated compared to historical levels, encouraging the central bank to stay on its monetary policy tightening path, especially as risks are still tilted to the upside for inflation.

Today investors will be assessing Poland's current account and trade balance statistics. Poland's external position deteriorated notably in the final month of 2021, with the current account deficit widening to a record high -EUR3.96bn. This outcome resulted from a high deficit in merchandise trade, narrow service surplus and a deficit in primary and secondary income. Market expectations are for the current account to record a narrower deficit for January, reflecting an improvement in trade fundamentals. Despite the expected improvement, the current account will have remained negative for the seventh consecutive month, which bodes unfavourably for the local currency as it remains vulnerable to external shocks.

Czech Republic: Producer prices in the Czech Republic accelerated further in February, topping both consensus expectations and the central bank's forecast. The PPI index rose to 21.3% y/y in February, accelerating from a 19.4% y/y advance in January, owing to a continuation of rising prices in electricity, gas and steam sectors, as well as in producer price growth in the food industry from the start of the year. Notably, this is the steepest rise in producer prices since 1992. What's more concerning is that the commodities shock from the Ukraine war has yet to be felt, implying that producers and consumers are in for a period of higher prices.

Monthly current account data is set to be released today and is expected to be market-moving. The Czech Republic has been running a current account deficit for some time, owing mostly to the deterioration in international trade and weak foreign direct investment. However, the CA is anticipated to have started the year with a more favourable balance due to a strong rebound in the nation's trade balance in January, which underpins the CZK's resilience amid the uncertain and volatile macroeconomic backdrop.

Forex: CEE currencies rise on hopes for de-escalation of conflict in Ukraine    

South Africa: The USD-ZAR continues to trade in a tight range between its 200-session moving average of 15.0300 and 15.1500, as traders stick to the sidelines ahead of today's Fed policy update. However, so much in the way of monetary tightening is already priced in, while reports of progress in Russia-Ukraine talks also suggest that the bias for the pair has shifted to the downside in the near term.

Turkey: Consolidation remained the order of the day for the USD-TRY, with the pair comfortably below the 15.00 handle. Investors appear to be erring on the side of caution amid the key event risks, namely the US Fed meeting slated for later tonight, the CBRT rate decision on Thursday and the ongoing negotiations between Russia and Ukraine. Given these key risk events, options traders are charging higher premiums to hedge against TRY's weakness. The overnight implied vol. tenor, for instance, has surged to reach 58.71%, a level last seen in the first two weeks of January.

Russia: The RUB has traded with a slightly more bullish tilt in recent sessions, with this owing to reports of tentative progress towards a de-escalation of the Russia-Ukraine war. Notwithstanding this improvement in sentiment towards the RUB, volatility is expected to remain the order of the day with no strong recovery forthcoming until the war ends. The RUB will thus remain vulnerable in the near term, especially since Western nations continue to dial-up pressures on Moscow with more aggressive sanctions.

Hungary: The HUF traded on the offensive for the second consecutive session, tracking the performance in the broader CEE FX space amid the thinned out liquidity conditions due to the long weekend. The local unit ramped up gains of about 0.78% to end the day pivoted north of the 370 mark, which has come into focus. Since reaching its record high of 394.10 more than a week ago, the HUF has managed to recoup more than 5.60% at the time of writing, trimming the losses to about 4.13% since the wake of Russia's attack on Ukraine. Investors will be paying attention to the geopolitical tension and US FOMC meeting for further directional guidance in the session ahead.

Poland: The correction for the EUR-PLN continued on Tuesday, with the cross extending its retreat by 0.98% and closing the session at a more than two week low of 4.6953. Downside momentum in the cross was driven by the improving risk aversion amid hopes for the Russia-Ukraine talks, optimism that Brussels will approve Poland's recovery program, and expectations for further interest rate hikes locally. Piercing below the 4.70 psychological support could potentially open the door for the EUR-PLN to pull back further. Investors will be paying attention to the domestic data calendar and the US Fed MPC meeting for further direction guidance in the session ahead.

Czech Republic: The CZK maintained Monday's gains after weakening slightly against the EUR yesterday, closing at 24.851/EUR. The CZK briefly pierced above the 61.8% Fibo retracement level at 24.793/EUR, stemming from January lows and February highs, but could not hold onto its gains. Nonetheless, hopes for a diplomatic solution to the war in Ukraine calmed regional markets. The local currency is trading flat at yesterday's closing level this morning, awaiting impetus from the local data card. With a slew of technical resistance levels, including the 61.8% and 76.4% Fibo and the 50DMA, at 24.650/EUR, moves higher for the CZK will be hard to come by unless the central bank steps into the market.

Fixed Income: The spotlight is on Fed rates lift-off today, with 25bp hike expected 

South Africa: Options traders are betting that a hawkish FOMC decision tonight will drive US Treasuries higher, which reinforces the point that investors remain highly cognizant of inflation risk first and foremost. Bloomberg data shows that demand for 1-month put options (the right to sell at a certain price) for 5yr US Treasuries has surged relative to call options (the right to buy at a certain price) over the past week. This is consistent with a view for the Fed to maintain its tightening stance for the foreseeable future. The SAGB curve has taken on a consolidative tone with investors likely to remain on the sidelines until the FOMC decision has been announced.

Turkey: The Turkish yield curve flattened on Tuesday, as the 1-year tenor added to its yield, while the rest of the curve shed through the session. Not too much can be read into the move, however, with yields generally remaining within their recent ranges to suggest it was more consolidatory than anything else. Today, the focus will be on the Fed's policy update, after which the spotlight will shift to the CBRT and its policy decision tomorrow. Investors are thus set for a busy second half of the week.

Russia: D-Day has arrived for Russian fixed income markets, with markets watching closely to see whether its debt coupon payments will go through. The Russian finance ministry issued an order to pay the coupons, but it didn't specify if the payments would be in USD (the currency they were issued in) or RUB. Note that Fitch Ratings put out a statement saying that if Russia doesn't pay the coupons in USD, Russia would be in default.

Hungary: The cost of insuring against default on Hungary's dollar-denominated has retreated from a recent high amid some correction in the local currency on the back of optimism surrounding Russia-Ukraine talks recently. Notwithstanding the drop, the 5yr CDS spread remains at multi-year highs suggesting that investors continue to err on the side of caution and protect themselves given the high level of uncertainty still present in the market. Until such a time when there is clarity over the ongoing war in Ukraine, we expect to see CDS swaps remain elevated going forward.

Poland: Polish bonds were offered some reprieve yesterday as inflation moderated for the first time in eight months which could have cooled down expectations of further aggressive rate hikes from the central bank. The rally in local bonds was also bolstered by hopes for the outcome of Ukraine-Russia talks. The most significant drop was seen at the long end of the curve, with the 10yr POLGB yield falling more than 18bps, followed by 5yr tenor, which was down more than 15bps and then the 2yr yield dropping more than 10bps. In the session ahead, bonds are likely to trade in a narrow range as investors exercise some caution as they wait for the US FOMC meeting, which will hold significant market-moving potential.   

Czech Republic: Markets are hopeful for a diplomatic solution to the standoff over Ukraine but remain far from convinced that one will be reached quickly. Reflecting the nervousness in regional markets is the rise in 5yr USD CDS spreads. Since Friday, the CZK 5yr CDS spread widened by 2bps to 45.705 and is on course to reclaim its March 8 highs of 47.13. Furthermore, the CDS may continue to widen as investors cope with a tighter monetary policy environment against a backdrop of high inflation, which will almost certainly hamper economic growth in the short run.