Morning Note /

EMEA Daily: Risk appetite recovers after sanctions, but volatility to remain

  • US President Biden unveils new sanctions on Russia, supporting market risk appetite overnight

  • CEE currencies lead FX recovery as market sentiment improves

  • Russian bonds to trade with high degree of volatility as investors digest Western sanctions

Danny Greeff
Danny Greeff

Financial Market Analyst

Daron Hendricks
Edmond Muzinda
Michael Potgieter
Takudzwa Ndawona
ETM Analytics
25 February 2022
Published byETM Analytics

Risk appetite recovers after Biden's sanctions, but volatility to remain high into the weekend

Talking Points: US President Biden unveils new sanctions on Russia, supporting market risk appetite overnight  

South Africa: Yesterday, the National Energy Regulator announced that it would allow Eskom to increase its tariffs by an average of 9.61% for 2022-23, well below the 20.5% tariff increase urgently applied for. The power utility had argued that the hike was necessary to help it service its R392bn of debt and pay for the maintenance. The lower permitted increase has several implications. While the lower increase will come as relief to consumers, it also suggests that maintenance backlogs may not be resolved. Furthermore, when hydrocarbon prices are incredibly high and rising, there is the risk that Eskom could exacerbate its funding shortfalls in its coal-dominated production structure. Diesel-based power generation is also often used when the grid is constrained at a significantly higher cost than coal.

Turkey: Headlining the data calendar today are the latest economic confidence figures. Confidence in the economy improved in January, with the index climbing to 100.8, bucking the trend that was seen three months prior. This was attributed to the increase in four of the five underlying subcomponents, with the most significant contributor being consumer confidence. Although economic sentiment has improved, the question of sustainability continues to linger given the underlying idiosyncratic factors, namely soaring inflation eroding purchasing power, a weak local currency, political uncertainty and an absence of needed reforms. These above-mentioned factors pose a risk to the economic outlook going forward, which should be reflected in the confidence indicator today.

Russia: President Biden yesterday announced the imposition of sanctions on Russia in retaliation for its invasion of Ukraine. The sanctions restrict Russia's trade in foreign currency and will target state-owned enterprises and Russia's banks directly. The objective is to plunge the Russian economy into a deep recession and hardship. Doing so will test the Russian electorate's tolerance for Vladimir Putin and his administration and act as a deterrent to other countries taking inspiration from Russia's aggressive geopolitical stance. It remains difficult to anticipate the longer-term consequences of all of this. Suffice to say, that it will likely be a catalyst for some significant structural changes in the global economy concerning energy independence, military spending, and strategic alliances.

Hungary: Matching expectations, the NBH hiked the one-week deposit rate for the first time in four weeks as the central bank responded to an increase in short-term risk in financial and commodity markets. The one-week deposit rate was hiked by 30bps to 4.60%, its highest level since Bloomberg started to track the time series. The hawkish move comes after the central bank pledged to do whatever it takes earlier in the week to help stem inflation risks that have unequivocally strengthened.

Today, the data card will have Hungary's unemployment rate on tap. Labour market dynamics have improved significantly since the start of last year, with the jobless rate falling from a peak of 5.0% in February to 3.7% in the final month of 2021. This reflects the further reopening up of the economy as vaccination efforts intensified, allowing mobility restrictions to be relaxed coupled with economic recovery. Against this backdrop, companies were able to absorb more people into the workforce to help ramp up production to meet the rising demand. The little slack in the labour market will help support domestic consumption, which bodes favourably for the domestic economic outlook. Looking ahead, the jobless rate is likely to remain anchored or fall further buoyed by the further economic recovery, labour shortages and rising wages.

Poland: The Polish government opened nine reception centres along its border with Ukraine in anticipation of an influx of refugees following the invasion of Russia. The reception centres will provide the refugees with arrival meals, medical care, a place to rest and receive information. Poland's Interior Minister Mariusz Kaminski told the media that Poland would take in as many refugees as it can. So far, about 29k people have crossed the border of Poland in both directions over the past 48 hours and more are expected to enter the country. The United Nations noted that the geopolitical crisis would have devastating humanitarian consequences and have urged neighbouring countries to keep borders open to those fleeing the violence.

Czech Republic: Confidence in the Czech economy continued to grow in February, rising by 1.6 points to 99.2. The economic sentiment indicator showed that consumers and businesses were more upbeat about domestic conditions, but this data is now obsolete, given the broader macroeconomic developments. All but one piece of information remains relevant. That is inflationary pressures expressed by the expected growth of selling prices across sectors, which will be exacerbated by current developments, including rising commodity prices and a weaker crown. Overall, February's optimism is not likely to improve in March, as the negative factors will predominate, at least in the coming weeks.

Forex: CEE currencies lead FX recovery as market sentiment improves 

South Africa: The ZAR recorded its biggest daily selloff since June 2021 yesterday, as investors streamed out of risk assets and into safe havens in response to Russia's invasion of Ukraine. However, they appear to have rediscovered their appetite for risk overnight, with global markets stabilising and risk assets regaining their composure. The ZAR, for one, has recovered most of yesterday's losses, and is trading at similar levels to what it was this time yesterday. Note, however, that short-term at-the-money implied vols are still very high, reflecting the level of market uncertainty and potential for large and volatile price swings in the coming sessions.

Turkey: The USD-TRY managed to pierce above the 14.00 handle, which was the hard line in the sand to the upside after the pair rallied by about 1.78% on Thursday. The topside impetus came on the back of the broad-based dollar appreciation as global risk appetite waned due to the Russian attacks on Ukraine. Heavy interventions by state banks failed to stem losses amid rising geopolitical tension. However, the advance has not continued in the early morning as the pair is trading relatively flat after being subject to some whipsaw action.

Russia: By yesterday's closing bell, the RUB was more than 10% weaker in week-to-date terms as investors streamed out of Russian markets amid concerns over what punitive measures Russia's invasion of Ukraine would trigger. Market sentiment has, however, recovered at the margin overnight, with the RUB starting today's session on the front foot after US President Biden's sanctions were less extreme than the worst-case scenario. The market remains highly uncertain, though, and the RUB is not out of the woods just yet. Volatility is expected to remain the order of the day heading into the weekend, as well as through much of next week.

Hungary: It was another upbeat session for the EUR-HUF as emerging market currencies come under pressure from the rising geopolitical risk following Russia's invasion of Ukraine. The cross firmed more than 2.90%, reaching the 370.37 mark, its best performance on record since Bloomberg started tracking the time series. The crisis has seen the cross erase all the losses suffered in January. However, the two-day rally is halted ahead of the Euro open as EM currencies cheer the US's harsher sanctions imposed on Russia. As such, the EUR-HUF has retreated by 0.88% so far.

Poland: Consistent with the underlying bias in the broader EM FX complex, the Polish zloty traded on the defensive against the EUR on the back of souring global risk sentiment as Russian forces moved toward Ukraine's capital of Kyiv. The local currency tumbled by about 2.64%, its steepest decline since March 2020, to end the day just below the 4.70/EUR mark, its worst level since the backend of November. The EUR-PLN has come off its recent high ahead of the early morning session following the US's harsher sanctions imposed on Russia. The local unit has appreciated by 1.25% today so far at the time of writing, which is almost half of the previous day's losses. Investors will continue to derive market direction from the ongoing geopolitical tension in the session ahead.

Czech Republic: Central and Eastern European currencies took a hammering yesterday in the wake of Russia invading Ukraine, which roiled risk appetite.  The CZK weakened by 0.50%  to close just north of 24.70.  Note, during intraday trade, the CZK broke above the 100-day SMA of 24.9998 but failed to sustain the move.  Heading into the EU open, the EUR-CZK cross is little-changed with further directional impetus likely to rest on the ebb and flow of global market sentiment.

Fixed Income: Russian bonds to trade with high degree of volatility as investors digest Western sanctions    

South Africa: FRA rates have been trading a little higher over the last few sessions and could continue just from a risk hedging perspective. The market will remain concerned about any unforeseen consequences of recent events, while Ukraine is becoming a major source of economic uncertainty. If the ZAR manages to hold up, this could ultimately be another receiving opportunity.

Turkey: Turkish bond yields continued to rise on Thursday, with uncertainty around the situation in Ukraine adding pressure on a market already vulnurable due to inflation and monetary policy uncertainty. Yields rose by up to 280bps through the session, although there are signs of these moves being reversed this morning as risk appetite recovers after President Biden's sanction announcement.

Russia: Given the situation in Ukraine, it is no wonder why Russian bonds sold off sharply yesterday. Yields at the front-end of the curve led the charge higher, with the one-year bond adding as much as 364bps to its yield through the session. Moves at the front-end were relatively more pronounced yesterday as Western sanctions on banks were aimed at forcing Russian interest rates higher and hurting the economy. Note that there may be some recovery in sentiment into the weekend after Western sanctions on Russia were announced, but volatility is expected to remain the order of the day over the near term.

Hungary: The Thursday regular auction saw the AKK sell HUF30bn of bonds, below the initial plan by HUF20bn, as demand disappointed. Looking at the individual tenors, the demand in the 5yr bond fell to HUF18.9bn compared with HUF32.9bn on February 10, prompting the AKK to sell HUF10bn cutting the original offer by HUF15bn. This generated a cover ratio of 1.89 versus 1.32 two weeks earlier. For the 10yr tenor, the government agency managed to sell HUF20bn, in line with the original offer after primary dealers' bids reached HUF49.4bn. The AKK also sold HUF5bn of 20yr bonds, slashing the original offer by half after primary dealers bid for HUF9.6bn.

The clearing yields were broadly higher, with the 5yr tenor recording a notable increase of 37bps from the previous auction's yields two weeks ago to clear at 4.96%. This was followed by the 20yr bond, which saw clearing yield rise 14bps above the yield at the previous auction of bonds four weeks ago to clear at 5.15%. The disappointing demand could be attributed to the increased rotation towards haven assets amid the geopolitical tension in the region over the Russia Ukraine invasion.

Poland: Appetite for POLGBs declined during the auction held yesterday, with total bids arriving at PLN4.51bn down from PLN7.32bn on Jan 27. This prompted the government to sell a combined PLN3.45bn, close to the lower end of the PLN3 – 6bn supply range. Looking at individual bonds, investors favoured the 2026 floater, which attracted demand of PLN1.37bn or 30.3% of the total bids. Interest was also notable in the 5yr and 10yr fixed rate bonds, with primary dealers bidding for PLN1.36bn and PLN1.35bn, respectively. At the top-up auction, Poland sold an additional PLN31mn in three types of papers. Following this auction, the Polish government has financed 55% of its borrowing needs.

In the secondary market, the Polish yield curve bear flattened, with the weakness more pronounced at the short end of the curve amid rising speculation that the NBP will hike rates faster and steeper as energy commodity price rises globally due to Russia's invasion of Ukraine. The 2yr POLGB yield drifted higher by more than 27bps to reach 3.904%, a multi-year high. This was followed by the 5yr tenor's yield, which surged by 16bps to 4.145% and then the 10yr tenor, which saw its yield climb by more than 10bps to 4.056%.

Czech Republic:  In the secondary market, subdued global risk appetite on the back of Russia's invasion of Ukraine saw CZK bonds close on the back foot tracking regional peers. Yields were broadly higher across the curve. Notable the 2-year and 6-year tenors rose by around 6bps each, with the former closing just shy of 3.600%. The 10v2 bond spread meanwhile widened to just over -57bps as the curve bear flattened. With the domestic data card empty today, CZK bonds will likely remain at the mercy of external developments.