Morning Note /

EMEA Daily: Risk assets set to trade positively into the weekend

  • Sentiment improves as market digests Fed rate hike, Russia-Ukraine talks, and China stimulus pledge

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

  • Investors awaiting feedback on Russian bond coupon payment for insights into new investor relationship

Danny Greeff
Danny Greeff

Financial Market Analyst

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

Risk assets set to trade positively into the weekend

Talking Points: Sentiment improves as market digests Fed hike, Russia-Ukraine talks, and China stimulus pledge 

South Africa: Last night, the US Federal Reserve provided one of the clearest signals yet that it would do whatever it takes to combat runaway inflation in the US. Accompanying an expected 25bps rate hike – the first since 2018 – Fed rhetoric was overwhelmingly hawkish, while its dot plots signalled six more rate hikes are on the cards for the rest of the year (one at every meeting). For the SARB, this reduces its decision set by quite some margin, as the MPC will be mindful of falling behind the Fed, which could lead the ZAR weaker. If the Fed sticks to its guns this year, the prospect of at least 150bp worth of rate hikes from the SARB needs to be considered.

On the data front, SA's retail activity continued on its recovery path at the start of the new year, reflecting recovering domestic demand and a further reopening of the economy. Specifically, retail sales growth surged from an upwardly revised 3.2% y/y in December (prior: 3.1%) to 7.7% y/y in January. This was the fastest pace of growth in seven months and trounced expectations of a less pronounced increase to 4.9%. The impressive y/y on growth figures, however, reflect base effects given that in January last year the economy was under notable lockdown restrictions, which would have curtailed spending. Month-on-month, retail sales grew 1.5% in January, down from an upwardly revised 1.7% in December (prior: 1.5%). This is a better reflection of current conditions and shows that the sector is expanding but momentum may be slowing. 

Turkey: Market attention will be squarely on the CBRT rate verdict slated for later. During the February meeting, the central bank kept the one-week repo rate unchanged at 14.00% for the second consecutive meeting despite economic conditions warranting tighter monetary policy. Forecasts compiled by Bloomberg shows that the central bank will stand pat once again. The political leadership continues to prescribe lower interest rates to support economic growth even though inflation is running above 54%, driven by a weaker lira and a jump in energy cost since Russia's invasion of Ukraine. Leaving the one-week deposit rate unchanged will keep the real rates deeply negative, putting pressure on the local currency and keeping capital outflows entrenched.

Russia: Negotiations towards a compromise in the Russia-Ukraine have reportedly taken a step forward, with Ukraine conceding it will drop its plans for NATO membership in a bid to encourage Russia to end the war. Russia responded by saying that a scenario where Ukraine becomes a neutral country (such as Sweden or Austria) but retains its own military "could be viewed as a certain kind of compromise". Although negotiators have said that demands in the talks have become more realistic, they remain difficult and volatile. Any market optimism founded in reports of progress is thus tentative at best, with the war in Ukraine still raging on.

Note that weekly CPI stats released out of Russia showed inflationary pressures eased at the margin in the week of 11 March, although there are growing signs of shortages in food stables and imported goods. The CPI grew 2.09% in the week, which was slightly lower than the 2.22% in the prior week. If price pressures don't ease significantly in the weeks ahead, the CBR would likely need to continue with aggressive rate hikes and capital controls.

Hungary: With Hungary's general elections less than three weeks away, Prime Minister Viktor Orban's chances of scooping another victory could be dented by the teachers' protest that erupted yesterday. Hungarian teachers announced that they had begun an indefinite strike to protest low pay. According to Bloomberg, teachers walked off the job across the country as thousands of students protested in Budapest to show solidarity. A study showed that  Hungarian primary school teachers receive the second-lowest wages among 37 members in the Organisation for Economic Cooperation and Development. It is worth noting that the tension between the government and teachers have been brewing over the low wages and escalated after the government issued a decree that restricts the right to strike by teachers. The opposition party politicians took the opportunity to criticise the ruling government, saying that the government has humiliated teachers in the past 12 years and pushed them to the brink of a subsistence crisis. 

Poland: Poland's trade fundamentals improved during the start of the year, reflecting the improvement in exports as global demand recovers. Specifically, the trade deficit narrowed from a record high of -€2.54bn in December to -€1.19bn in January. The latest trade gap bettered expectations of a less pronounced improvement to -€1.46bn anticipated by economists surveyed by Bloomberg. Given the improvement in trade dynamics, Poland's current account deficit also surprised to the upside, compressing from -€3.96bn in December to a minor shortfall of -€64m in January, beating expectations of a deficit -€871m.

Yesterday's other release showed that Poland's core inflation continued to edge higher, accelerating for the eighth consecutive month in February, highlighting that broader price pressures are also emanating from the recovery in domestic demand. Specifically, core inflation surged from 6.1% y/y in January to 6.7% in February, the fastest pace of growth in more than two decades amid the rejuvenation in consumption buoyed by tightening labour market and high wages. With both demand and supply-side pressures contributing to the broader price growth, this will justify the NBP's commitment to tighten monetary policy further in the coming months. 

Czech Republic: The Czech Republic's current account (CA) surplus came in wider than expected in January, rising to CZK7.74bn following a revised shortfall of CZK27.27bn in the month prior. Notably, this is the largest surplus since May last year, supported by a surplus in the balance of goods and services amounting to CZK18.3bn. However, the surplus has almost halved from last year because of supply chain issues that continue to harm industrial production and hence the export side of the CA. This theme of a narrower surplus may persist in the months ahead as the economic effects of higher commodity and energy prices, together with currency depreciation, weighs on the demand for exports while bolstering the cost value of imports. Meanwhile, primary and secondary income recorded a surplus of CZK1.9bn on transfers from the EU budget to the Czech Republic. The inflow of capital on the financial account totalled CZK8.4bn owing to liabilities rising faster than assets. The upcoming data is expected to show a significant outflow of funds due to the war, implying that the CA could revert to a deficit in March.

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

South Africa: Risk sentiment has improved notably overnight as the market digested the Fed's hawkish rate hike, China's promise of additional stimulus, and reports of progress in Russia-Ukraine talks. Commodities have generally also held up well despite the Fed's hawkish forward guidance, with this providing added support to the likes of the ZAR. Amid the improvement in risk appetite, the USD-ZAR has crashed through the 15.0000 handle and is now testing technical support at its February low of 14.9100. Note that this support level lines up with the 50.0% retrace level of the pair's H2 2021 uptrend, meaning a break could provide strong impetus to its jagged downtrend of late.

Turkey: The USD-TRY continues to consolidate as the local unit is being offered some reprieve by the broad-based dollar weakness and improving risk aversion amid the progress in the Russia-Ukraine talks, which has seen commodities that were stoking inflation pressures pullback. The stable performance could also be spurred by investors erring on the side of caution as they await the CBRT MPC meeting slated for later. Overnight implied volatility continues to climb higher, reaching 55.24%, its highest level since January 11, ahead of the meeting.

Russia: The RUB's recovery continued on Wednesday, with trade in offshore markets now reflecting a sub-100/$ exchange rate. Volumes remain extremely thin, however, leading to widened bid-ask spreads and heightened intraday volatility. Large price swings will thus remain the order of the day for the foreseeable future, although the bulls do appear to have the wind at their backs on hopes for progress in ongoing Russia-Ukraine talks.

Hungary: Tracking the performance seen in the CEE region, the HUF traded on the front foot against the EUR on Wednesday. The local unit eked out gains of about 0.22% to close the session pivoted slightly above the 370 mark, which is the psychological support. However, the marginal gains in the HUF show that momentum to the downside is limited. Ahead of the Euro open, the EUR-HUF is trading relatively flat as the further retreated was capped by a more hawkish US Fed during their meeting last night.

Poland: The EUR-PLN bears remained in control for the third successive session on Wednesday as risk aversion subsided following some positive developments over the negotiations between Russia and Ukraine. Intraday, the cross rejected the move higher and closed the session 0.40% below the previous close. An additional headwind to the cross stemmed from the improvement in Poland's trade and current account data. However, the start of policy normalisation by the US Fed capped the losses in the EUR-PLN. With no local data slated for releases, attention will turn to offshore developments and lingering geopolitical risks for directional momentum. 

Czech Republic: The CZK rose significantly on Wednesday, approaching its pre-Russian-invasion level. The CZK momentarily surpassed the 50DMA resistance at 24.650/EUR before closing at 24.673/EUR. The CA balance would have supported the CZK, but its strength since Russia's onslaught has mostly been due to the CNB's intervention. It should be noted that CZK gains versus the EUR have been more significant than those against the USD thus far. In pre-market trade today, the CZK has edged higher against the EUR as it awaits impetus for a clean break above the 50DMA. Still, moves beyond the resistance level will be hard to come by, with the bullish bias showing signs of weakness. This, of course, will depend on the central bank's role in the spot market.


Fixed Income: Investors awaiting feedback on Russian bond coupon payment for insights into new investor relationship 

South Africa: SAGBs could come under some pressure in response to the Fed meeting, but with the ZAR holding up and yields already high we remain cautiously optimistic for a bull run. Bull flattening seems the most likely move in the months ahead with rate hikes generally already priced in. Meanwhile, the FRA market remains poised for an aggressive policy tightening cycle with just under 200bp expected by year end. This remains within the realms of reason when considering Fed guidance but remains a significant risk to the fragile SA economy. It will be interesting to see whether long end receivers remain dominant through the session ahead when considering that the market is a little overpriced relative to Fed guidance.

Turkey: Turkish government bonds consolidated on Wednesday, with the curve under only marginal steepening pressure ahead of today's CBRT policy update. Notwithstanding the importance of global developments at the moment, especially in Ukraine (war and negotiations), China (promise of stimulus), the US (Fed rate hike), and the UK (BoE decision today), the CBRT's policy decision and accompanying forward guidance will likely be the central driver of the local market in the session ahead. Consensus expectations are for the bank to keep the benchmark rate unchanged at 14.00%, meaning any deviation from this would likely drive significant market moves into the weekend.

Russia: Russian Finance Minister Anton Siluanov said yesterday that Russia had attempted to make interest payments on two USD-denominated government bonds, and that it was now up to the US to make sure the payments go through. Russia was due to pay $117m on bond coupons yesterday, but the fear is that recent sanctions potentially block Russian foreign currency accounts from making these payments. Note, however, that a US Treasury official has said that Western sanctions do not currently block Russia from making interest payments on USD-denominated bonds, suggesting that the coupon payments would go through and technical default would be avoided. Investors will now be watching closely for confirmation of the payments going through, as it will be a critical indicator of how Russia intends to manage its relationship with global investors going forward.  

Hungary: Appetite for short-dated assets moderated during yesterday's auction, with total demand for three-month discount bills arriving at HUF50.4bn down from HUF88.9bn on March 8. However, the AKK managed to sell HUF30bn, which was in line with the original offer, the drop in demand notwithstanding. This generated a bid to cover ratio of 1.68 versus 2.96 in the prior week. The average clearing yield came in at 5.57%, unchanged from the yield at the previous auction of bills a week earlier but 13bp over the secondary market benchmark.

In the secondary market, HGBs bucked the sell-off that was seen in the prior two sessions as global sentiment improved, driven by the hopes for peace amid the Russia-Ukraine talks. Yields were broadly lower across the curve, with a pronounced drop observed at the belly and long end of the curve. Notably, the 5yr and 10yr tenors drifted lower by more than 9bps apiece. 

Poland: Global sentiment received a boost yesterday as talks between Russia and Ukraine promised the crisis could end soon after Russia signalled a potential compromise to end the war. Polish bonds rallied as a result, with yields dipping across the curve for the second consecutive session. Both the 2yr and 10yr drifted lower by more than 19bps apiece, while the 5yr tenor's yields fell by more than 26bps to reach 5.0616%. An additional tailwind for the local bonds came from the moderating commodity prices that were boosting inflation expectations during the last couple of weeks. However, with the US Fed beginning its tightening cycle after hiking the policy rate by 25bps and prospects of further tightening from the NBP due to rising inflation, the rally in the local bonds could be short-lived.   

Czech Republic: A receiver bias was evident along the IRS curve yesterday, with swap rates falling modestly. The 20yr swap rate was the exception, falling almost 10bps rather than the 4bps seen elsewhere on the curve. The decline in swap rates stems from reports that Russia-Ukraine negotiations are a bit more constructive, which is beginning to see investors concentrate more on central banks' moves. If the situation continues improving, the market's focus will permanently shift to monetary policy tightening, inflation, and higher yields. Recent comments by the CNB Governor have been more dovish as authorities remain wary of stagflation.