Morning Note /

EMEA Daily: Risk aversion fading as Presidents Biden and Putin agree to a summit

  • Budget week for SA, while rest of EM focuses on Russia-NATO standoff around Ukraine

  • EM currencies recover as risk aversion moderates after geopolitical progress around Ukraine crisis

  • SA bonds to find direction from highly-anticipated budget speech this week

Danny Greeff
Danny Greeff

Financial Market Analyst

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

Risk aversion fading as Presidents Biden and Putin agree in principle to a summit

Talking Points

South Africa: Budget week has arrived, and investors will be watching closely to see if Finance Minister Godongwana follows through on the commitments made in his medium-term budget policy statement (MTBPS) back in November. The minister will present the 2022 budget on Wednesday, and there is a sense of cautious optimism that he might announce fiscal reforms aimed at crowding in the private sector, and provide answers on how the government plans to reduce financial support for dysfunctional SOEs and stop public-sector wage growth. A change in the statistical methodology to calculate GDP recently made the country's debt pile look significantly more manageable, which, alongside strong commodity revenues, has provided SA with a lifeline. But the time to use it is now; global financing conditions are tightening at a rapid pace, and failure on the government's part to implement the reforms it has promised the markets in recent months will not go unpunished.

Turkey: Kicking off the new week is the latest foreign tourist arrivals data. Data from the Culture and Tourism Ministry showed that international tourist arrivals rose for the third consecutive month to 171% y/y in December compared with 112% in the prior month. Overall, full-year tourism arrivals expanded 94% y/y to 24.7m in 2021. The rebound came on the back of the low base effects from the sector's plunge in 2020 due to the global pandemic and the easing of mobility restrictions. The recovery in tourist arrivals bodes favourably for the current account as we should see it persist through 2022, especially with the currency plunging which makes Turkey an attractive destination. Furthermore, with countries learning to live with COVID-19 and increased vaccination efforts, the tourism sector is likely to continue its recovery as borders are re-opened.

Russia: The big news regarding the ongoing Russia-NATO standoff around Ukraine this morning is that US President Biden and Russian President Putin have agreed "in principle" to a summit. Although it is unclear what breakthrough the two could engineer, it will be seen as mildly encouraging that all diplomatic efforts have not yet been fully exhausted. This may take some of the edge off expectations of war and help stabilise global financial markets that have priced in higher degrees of risk aversion. The substance of this summit will likely be worked out by US Secretary of State Blinken and Russian Foreign Minister Lavrov during their upcoming meeting on Wednesday. All the while, the markets will likely continue chasing headlines despite no possible way of knowing what will play out.

Hungary: Speaking at the Hungarian Chamber of Commerce and Industry conference over the weekend, Prime Minister Viktor Orban is expecting the anti-inflation shields to help bring inflation down below 6% by the end of the year from 7.9% in the first month of 2022. While noting that the policy of four price caps did not feel good, Orban vowed that the measures will remain until inflation starts slowing, as the situation remains a desperate one.

Regarding the latest ruling by the EU top court to deploy new powers that could deny Hungary billions of euros, Prime Minister Orban said the government will have to foot in the funds to bridge the financial gap needed to finance development programs in the meantime. With Hungary's balance of profits negative and 77% of this offset by EU money, the lack of EU backstops will pressure the government books until the funds are released.

Poland: Supply-side inflation continued to accelerate in Poland, with producer prices rising for the sixteenth successive month in January to reach 14.8%. This was the fastest pace of growth since December 1995 and compared to 14.2% recorded in the trailing month and 14.4%, a median estimate of analysts surveyed by Bloomberg. The annual increase in producer price inflation stemmed from the higher costs of electricity and gas, mining and quarrying, and water supply products. The persistent increase in producer prices is driving the broader price growth in Poland as firms transfer some of the costs to consumers. Looking ahead, the shortage of gas supplies in Europe alongside ongoing supply-side disruptions and higher freight costs will keep supply-side inflation pressures entrenched.

Headlining the data calendar today is Poland's retail sales data for January. Domestic consumptive dynamics remain relatively robust despite retail sales growth moderating in December. Support for the retail sector comes on the back of recovering economic growth, anti-inflation measures, the drawdown on savings, recovering global demand and a tight labour market. Market expectations are for retail sales to remain elevated in January, with growth of nearly 20% y/y. This bodes well for the domestic economic growth outlook.

Czech Republic: On Friday, the new Czech government outlined its plans to cut spending in this year's budget in its first reading. "The government must and will slim down," Prime Minister Petr Fiala said as he proposed a CZK77bn spending cut to Parliament. Funding for renewable energy subsidies, special payments to hospitals, and civil servant salaries, among other things, would be reduced. This would result in an expected budget deficit of approximately CZK280bn in 2022. The proposed cost-cutting measures are at the centre of attention and were also addressed by President Milos Zeman (his first visit to Parliament since his hospitalisation last year), who advised the government to raise taxes and do away with tax exemptions of all kinds.

Meanwhile, the lower House of Representatives overruled the Senate on Friday to pass a contentious amendment to the Pandemic Law, giving the government greater authority to impose restrictions without declaring a state of emergency. Out of the 187 deputies present, 104 approved the measure. Some senators who voted against the bill claimed it was unconstitutional or had other procedural flaws.


South Africa: The coming week holds much promise, but also an equal amount of uncertainty and risk. Cautiously optimistic trade is expected at the start of the week, while speculation around any shocking headlines holds the potential to trigger bouts of volatility. The ZAR bulls will continue to target the R15.0000/$ mark, having struggled to sustain breaks of this level in recent days. However, much depends on this week's risk events, which hold the market-moving power to determine how the local unit performs through much of the rest of the quarter. 

Turkey: The TRY came under some selling pressure on Friday amid monetary policy concerns following the CBRT's decision to keep interest rate unchanged, leaving the country's real rate at the lowest among emerging-market peers. The local unit lost about 0.54% against the USD to the 13.6577 mark, staying within its narrow recent trading range. Although the new instruments have stabilised the currency, the risk of the TRY selling off remains to the upside amid the high negative real rates, political uncertainty, threats to central bank independence and concerns around the Russia-Ukraine standoff.

Russia: The RUB has recovered strongly this morning from Friday's losses. The currency is back below the 78.0000/$ handle, with the bulls tentatively in charge as investors digest the weekend's developments around Ukraine. There are renewed hopes that diplomatic efforts may end the crisis and prevent an invasion now that Presidents Biden and Putin have agreed in principle to a summit. Still, the situation remains highly volatile and uncertain, and the RUB is expected to trade accordingly.

Hungary: The EUR-HUF took a hiatus on Friday, snapping the two-day rally seen previously. There was a push and pull contest intraday before players decided to call it a draw, leaving the cross relatively flat. The cross pivoted below the 200-SMA (357.2322), the immediate resistance. With the market sentiment likely to remain cautious amid rising geopolitical risk coupled with the looming rate decision, the EUR-HUF could consolidate in the session ahead.             

Poland: The final trading session of the week saw the EUR-PLN extend its rally to three consecutive sessions driven by the continued fears of an escalation of the Russian-Ukrainian crisis and a broad-based dollar strengthening. The cross advanced by 0.20% and ended the day at 4.5303. However, the gains were limited by the strong industrial data and investor expectations of continued monetary policy tightening. Ahead of the euro open, the EUR-PLN is trading on the back foot, sliding 0.34% at the time of writing. Whether or not the losses will be sustained remains to be seen as investors remain concerned about the geopolitical risks.  

Czech Republic: Most central European currencies rose on Friday, recouping some of the previous session's losses, as markets looked for signs of easing geopolitical tensions. The CZK finished the week at 24.321/EUR, up nearly 1%, outperforming its regional counterparts. As a result, the CZK's year-to-date gains against the EUR have increased to 2.3%. The unfavourable external environment has weakened the CZK's strength, but with risk appetite returning, it might climb to its 2011 high of 23.930/EUR. The CZK is trading on the back foot at 24.325/EUR this morning amid investors scepticism over a possible Biden-Putin summit.

Fixed Income

South Africa: The SAGB curve rallied last week, leading the ALBI up 3.6% YTD in ZAR terms and around 9% in USD terms. The market is experiencing a surge in optimism as the government appears to be stepping out of fiscal profligacy. The R186 has notably made a technical break lower on the yield chart, while FRA rates were received. This will slow the bull flattening of the curve, but if NT continues to script on the fiscal reform outlook, bonds could outperform through February.

Turkey: Turkish bonds were a mixed bag last week, with yields at the short-end falling along with the long-end, while bonds at the belly of the curve added to their yields. Inflation and uncertainty around prospective central bank policymaking mean Turkish bonds remain risky, while the prevailing geopolitical risks around Ukraine are only adding to broader risk aversion. Note that on that front, there have been some positive developments over the weekend that could support general risk appetite at the start of the new week.

Russia: Russian bonds remained under the gun last week, with yields rising across the curve over the course of the five sessions as investors remained cautious over the ongoing Russia-NATO standoff around Ukraine. Some positive news and progress over the weekend may tentatively support the market at the start of the new week, but the situation remains extremely risky and uncertain. The broader bias thus remains cautious, with more volatility expected in the week ahead.

Hungary: In last week's final trading session, Hungarian bonds traded in a mixed fashion. The front and the belly of the curve extended their rally to two straight sessions, with the 3yr and 5yr tenor's yields dipping marginally by more than 1bp apiece. At the long end, the 10yr HGB traded relatively flat. Zooming out, the broader picture showed a bear flattening bias in the yield curve last week. The 3yr HGB's yield drifted higher by more than 11bps while the 10yr HGB rose more than 1bp. The curve's flattening bias came from the back of hawkish rhetoric struck by the central bank official, which raised wagers for more monetary policy tightening. Local bonds are likely to remain under pressure this week amid the geopolitical tension over the Ukraine saga and the prospect of further tightening by the central bank.

Poland: During its first credit rating review of the year, Fitch Ratings affirmed Poland at 'A-' with a stable outlook. The affirmation balances a diversified economy and a record of stable growth in recent years and a relatively sound macroeconomic framework against governance indicators and income levels lower than rated peers. Meanwhile, the stable outlook reflects the Polish economy's solid growth prospects, with potential upside from the next generation EU funds when approved and a faster than previously expected decline in the public deficit and debt levels as the economy rebounds. The global rating agency noted that Poland will be liable to a rating downgrade due to sustained increase in government debt, (for example from a looser fiscal stance, crystallisation of contingent liabilities) and deterioration of governance standards or the business climate leading to an adverse impact on the economy. Meanwhile, a rating upgrade is possible amid a sustained decline in government debt/GDP due to fiscal consolidation, sustained

Czech Republic: Czech bonds finished a volatile week on a quiet but positive note amid hopes that diplomacy might resolve the Ukraine crisis. Specifically, local bond yields fell between 2bps – 4bps across the sovereign bond curve. Overall, the inversion of the local yield curve intensified last week, following a 15bps drop in 8yr and 9yr bond yields, while the 10yr benchmark bond yield fell by 10bps to 2.937%, slipping from its 2012 highs. The 10v2 bond yield spread wasn't trading far off its record lows, around negative 66bps. With the geopolitical backdrop and expectations that the CNB will continue its hiking cycle in March, the spread will likely slip lower and probe its record lows.