Morning Note /

EMEA Daily: Russia begins fresh assault in Ukraine; SA in new state of disaster

  • South Africa back in national state of emergency after devastating floods

  • EM currencies to be tested by surging USD as liquidity conditions normalise after long weekend

  • Innovative suggestions made to avoid artificial Russian debt default

Danny Greeff
Danny Greeff

Financial Market Analyst

Daron Hendricks
Edmond Muzinda
ETM Analytics
19 April 2022
Published byETM Analytics

Russia begins new assault in eastern Ukraine, while SA is thrown into another state of disaster

Talking Points: South Africa back in national state of emergency after devastating floods 

Global: A smaller-than-expected cut to Chinese reserve requirements on Friday raised concerns that not enough is being done in the world's second-biggest economy to offset the economic fallout of the pandemic. While more monetary stimulus from the People's Bank of China (PBoC) may well be on the way, initial reactions suggest an insufficient response to the economic damage wrought by the government's 'zero-COVID' pandemic policy.

South Africa: In response to the devastating floods in Kwa-Zulu Natal, President Ramaphosa declared a new national state of disaster on Monday to accelerate recovery and reconstruction efforts in the province. The full scale of devastation of the floods is now more clearly understood, and with over 400 people dead and huge amounts of infrastructure decimated, it is clear this will have a significant impact on the South African economy. The president maintained that the state of disaster would allow the government flexibility to urgently mobilise resources to repair damage to ports and surrounding infrastructure and implement an effective recovery response.

Meanwhile, Eskom announced that it had lost more power-generation capacity over the weekend, and that load-shedding would be extended until Wednesday morning. The power system remains unpredictable, and a further deterioration in generation capacity has led to the implementation of stage four load-shedding this morning.

Turkey: Consistent with market expectations, the CBRT kept the policy rate unchanged at 14% last week. This marked the fourth successive meeting the bank has stood pat on the policy rate despite the soaring inflation. In a statement accompanying the rate verdict, the central bank said that the increase in inflation in the recent period had been driven by rising energy costs resulting from geopolitical developments, temporary effects of pricing formation that are not supported by economic fundamentals and strong negative supply shocks caused by the rise in global energy, food and agricultural commodity prices. The bank also reiterated that it expects the disinflation process to start on the back of measures taken and decisively pursued for sustainable price and financial stability along with the decline in inflation owing to the base effect and the resolution of the ongoing regional conflict.

Russia: Russian forces have launched their long-anticipated offensive in eastern Ukraine, attempting to push through defences along almost the entire front line at the early stages of this week. There have been suggestions recently that the Russian onslaught could be escalated in the weeks ahead, as the Kremlin may want to have something to claim by the Victory Day public holiday on the 9th of May. For now, the war in Ukraine appears far from over, which will keep financial market volatility heightened for the foreseeable future.

Hungary: Preliminary monthly data released by the National Bank of Hungary (NBH) revealed that Hungary's external position continues to deteriorate, driven primarily by the rising energy prices, which have a considerable negative impact on both the terms of trade and the current account balance. Hungary's current account deficit widened from €763mn in January to -€794mn in February. This is a significant decline compared to a current account surplus of €115mn recorded during the corresponding period in 2021. The widening current account shortfall is attributed to the primary income deficit, narrowing capital account surplus and a deteriorating trade balance due to rising import bills from higher energy prices and the fall in external sales of Hungary's export-oriented economy. A weak external position will weigh on the local currency as it increases its vulnerability to external shocks.   

Poland: Data released on Friday showed that Poland's consumer prices continue to increase further, highlighting the lingering supply-side challenges compounded by the lockdowns in some parts of China and the ongoing crisis between Russia and Ukraine. Specifically, final headline inflation jumped from 8.5% y/y in February to 11.0% y/y in March, the fastest pace of growth since March 1998. The latest CPI print was higher than the preliminary growth reading of 10.9%. Details from the Polish Statistics Office reveal that the recent CPI print was driven mainly by the higher costs of electricity, gas and other, transport, dwelling, restaurants and hotels and food, beverages and tobacco. With inflation showing no signs of subsiding, this corroborates the case for the central bank to tighten monetary policy further in the coming months.

Czech Republic: The Finance Ministry's April macroeconomic forecast, in which it downgraded its GDP estimate for this year to 1.2%, is realistic, according to most members of the Committee on Budgetary Forecasts. At a meeting on Friday, six out of the seven members of the committee were in favour of the prediction being realistic, and one member considered it optimistic, the Czech Fiscal Council said in a press release. The members pointed out the extraordinary aspect of external shocks with the Ukraine war deteriorating the outlook for the months ahead. Some members see the high-inflation environment as a risk to household consumption or company profits and investments. Significant risks to the macroeconomic development in 2022 and 2023 are also a concern for budget revenue. The committee mainly discussed growing inflation and its impact on the budget's revenue side. Some members said that businesses may see their profits fall, which will lower corporate income tax collection in 2022 and 2023.

Forex: EM currencies to be tested by surging USD as liquidity conditions normalise after long weekend

South Africa: Although many factors can contribute to ongoing ZAR resilience for a while longer, one gets the impression that a near-term correction of sorts could easily unfold. The USD remains on a tear more broadly, with continuously rising US Treasury yields testing the market's appetite for risk as an aggressive Fed monetary tightening cycle draws nearer. Heading into today's open, the USD-ZAR is looking comfortable trading just below the 14.7000 mark, although the techs suggest there is some two-way currency risk for the near term.

Turkey: The USD-TRY remained in a consolidatory channel for the fourth consecutive session during the start of the new week. The 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 US Fed, buoying the greenback and driving UST yields higher.

Russia: In recent sessions, the RUB has consolidated around the 79.00/$ mark, with investors watching new developments in the Russia-Ukraine war closely. The war and consequent sanctions remain the biggest risks to the Russian currency at this time. Although the initial RUB sell-off has reversed due to capital controls and continued energy exports, the currency remains highly vulnerable to weakness and is not reflecting its true value at this time. That being said, it will likely continue to trade around the 80.00/$ mark in the near term, with Russian authorities doing what's necessary to avoid an inflationary RUB sell-off.

Hungary: The EUR-HUF descent continued yesterday, extending its losing streak to five sessions. The cross lost about 0.72%, reaching 373.28, its lowest level in two weeks. A breach below the 375 support could potentially pave the way for the EUR-HUF to test the 50-SMA at 371.089. However, further movement to the downside could run into obstacles stemming from the hawkish US Fed, buoying UST yields, and a stronger dollar. The ongoing tension between Russia and Ukraine will also continue to weigh on sentiment and cap any movement to the downside. Therefore, buying the dips remains favoured. 

Poland: The start of the new week saw the EUR-PLN trade on the defensive amid dialled up wagers of more interest rate hikes following a more pronounced increase in consumer prices. The cross slipped by 0.10%, extending its losing streak to four consecutive sessions and reaching the 4.6218, its lowest level since February 24. A sustained breach below the 100-SMA at 4.6224 could potentially open the door for the EUR-PLN to test the 200-SMA at 4.6073. 

Czech Republic: In holiday-thinned trading, the EUR-CZK was little changed, closing at 24.426. Investors assessed broadening inflationary pressures with oil prices continuing to rise while the war in Ukraine raged on. The EUR-CZK is bid this morning, trading above 24.450 at the time of writing. Traders will likely be cautious in placing bets coming out of a holiday-extended weekend. As a result, the pair could continue to trade within a narrow range between 24.400 and 24.600. The underlying bias for the EUR-CZK remains orientated to the topside.

Fixed Income: Innovative suggestions made to avoid artificial Russian debt default    

South Africa: Bond yields rose last week in response to the depreciation of the ZAR, which raised some eyebrows. The curve steepened if the R186 vs R213 spread is anything to go by and reflects a realistic expectation of GDP growth and the monetary policy that will be adopted. In contrast to the bond yields that rose, the FRA curve was received lower, especially in the middle to longer dates, suggesting that the market may be rethinking its positioning. Explaining at least some of the difference in performance is the behaviour of US Treasury yields and the relatively hawkish comments from various Fed speakers that have hinted at a more aggressive stance as the Fed seeks to catch up to the inflation curve.

Turkey: Today, the Turkish Treasury will come to the market with 2-year and 4-year fixed coupon bonds on offer, alongside 10-year CPI-indexed lease certificates. Demand dynamics will be interesting, and could provide fresh insights into the market's view on the CBRT's credibility and whether it will be successful in combatting runaway inflation in Turkey. Turkish bond yields remain high, however, which should keep investors interested and demand strong.  

Russia: The Russian Union of Industrialists and Entrepreneurs (RSPP) has put forward potential methods to avoid default on Eurobond coupon payments. It proposed that bondholders substitute the foreign payment agents and register for the national settlement depository. Alternatively, it said another option would be to send payments for non-residents to special accounts in Russian banks and allow non-residents the opportunity to sell their bonds to the finance ministry. Notwithstanding the recent surge in CDS rates, Russian default is not a given, with innovative ideas to avoid an articifical default coming to the fore.

Hungary: Hungarian swaps were muted during the first trading session of the week, bringing to a halt the receiver bias seen in the previous sessions. The steady performance in the swap market comes as the central bank paused its effective rate hikes last week. However, the elevated inflation risks amid the lingering geopolitical tension supporting global commodity prices alongside the more hawkish signals from the US Fed suggest that the muted response in IRS yields could be short-lived. As such, rates are expected to resume their move higher in the sessions ahead. 

Poland: Polish bonds are likely to come under selling pressure in the session ahead following the higher than expected CPI print for March, stoking speculation for more rate hikes by the NBP and rising UST yields amid the more hawkish signals from the Fed officials. Investors are also still cautious amid rotating into the region given the uncertainty surrounding the situation in Ukraine, which is weighing on risk appetite. Given these above-mentioned factors, Polish risk premiums have risen this year despite the drop seen in recent sessions. Looking at the Polish 10yr yield spread over German bunds, it is sitting just north of 500bps, a multi-year high. With Poland looking to return to the international debt market, the higher risk premium will raise the country's borrowing costs, although could help attract demand for those willing to take on the risk for the high yields on offer.

Czech Republic: Due to the national holiday, there was no trading in the local fixed income market yesterday. This allows us to zoom out and examine the performance of the swap market as we enter the second half of April. So far, a payer's bias has dominated the curve, with swap rates rising by a modest 10bps on the short-end but rising by double or treble that on the belly and the long-end. The result, is that the 2v10 IRS swap spread has disinverted to a less negative 133bps, off its lows of -160bps. This comes after CNB Governor Jiri Rusnok dampened markets' expectations of rate hikes. We do not expect many hawkish triggers in the coming days, and market rates may remain at lower levels for several days as the CNB will have a draft of a new forecast in hand. The payer's bias in the swap market could begin to unwind should the forecast highlight significant downside risks to economic growth.