Morning Note /

EMEA Daily: Russia-Ukraine war continues to weigh on sentiment

  • EU nations to debate Russian oil embargo

  • EM currencies end week on the defensive, but more stable

  • Russian coupon payment reportedly successful, but risks remain

Danny Greeff
Danny Greeff

Financial Market Analyst

Takudzwa Ndawona
Daron Hendricks
Edmond Muzinda
ETM Analytics
21 March 2022
Published by

Russia-Ukraine war continues to weigh on sentiment at the start of the week

Talking Points: EU nations to debate Russian oil embargo   

South Africa: Public holiday.

Turkey: Headlining the data calendar today is Turkey's foreign tourist arrivals statistic. Data from the Turkish Culture and Tourism Ministry revealed that tourist arrival growth fell at the start of the new year from 170.6% y/y in December to 151.4% y/y. Notwithstanding the recent drop, tourist arrivals remain elevated compared to historical levels. This could be attributed to the base effects that are still at play and the easing of mobility measures as the COVID-19 situation improves. In addition, the sector's strong performance is also being supported by the decline in the Turkish lira, making the country a more attractive destination. However, the soaring costs and a further escalation of the fallout between Ukraine and Russia could pose some risk to the sector's performance.

Russia: EU nations will consider imposing an oil embargo on Russia over its invasion of Ukraine when they meet this week. Seeking to raise the cost of war and force a withdrawal out of Ukraine, The EU imposed harsh sanctions on Russia in recent weeks, but generally avoided oil given the bloc's dependence on the expensive commodity the impact an embargo would have on mounting stagflationary pressures. However, French President Immanuel Macron recently noted that if the situation in Ukraine worsens, there should be no "taboos" in terms of sanctions. According to Reuters sources, a Russian chemical weapons attack or  heavy bombardment of Kyiv could be potential triggers for an oil embargo.

In other news, note that Russian President Vladimir Putin endorsed CBR Governor Elvira Nabiullina for a third five-year term as head of the central bank. The lower house of Russia's parliament will consider Nabiullina's reappointment today, although it is all but assured given Putin's support. Nabiullina has led the CBR through multiple crises since 2013, gaining global recognition as a prudent monetary policymaker and reputable technocrat who is focused on fighting inflation even at the expense of economic expansion. Although likely to be eclipsed by ongoing developments in Ukraine, Nabiullina's reappointment would be market-positive as it would point to Russia's structure of inflation targeting remaining entrenched.

Sticking with the central bank, the CBR kept Russia's benchmark interest rate unchanged at 20% on Friday. The bank noted the scale of damage to the economy stemming from Western punitive measures over Russia's invasion of Ukraine, warning that output will contract over the coming quarter and inflation won't return to target until 2024. In the accompanying statement, the CBR noted that "the Russian economy is entering a phase of large-scale structural transformation, which will be accompanied by a temporary but inevitable period of increased inflation".

Hungary: Data from the Central Statistics Office (KSH) showed that guest nights at commercial accommodations in Hungary rose 4.5-fold to 951k in January on the back of low base impacted by travel restrictions in the base period. Accommodation providers are forecasting a fast recovery of the sector in the spring due to the rising purchasing power of households, helped by the massive pre-election handouts and improving pandemic situations. However, this could be impacted by price hikes on demand triggered by the rise in energy and food prices, dire labour squeeze and the ongoing Russia-Ukraine war. Market players noted that foreign guests were cancelling trips to Hungary after the Russian invasion of Ukraine, as the region is seen as risky due to its proximity to the conflict zone.

Poland: Data released last Friday showed that Poland's producer price inflation slowed less than expected in February, bucking the trend seen 17 months prior. Producer price inflation decelerated from an upwardly revised 16.1% y/y in January (prior: 14.8%) to 15.9% y/y in February, missing expectations of a more pronounced drop to 15.2%, a median estimate for economists surveyed by Bloomberg. Although producer price growth dropped, overall inflation levels remain high, buoyed by the ongoing supply-side bottlenecks, high global commodity prices, shortage of raw materials and higher input costs. Against this backdrop, PPI contributes significantly to the broader price growth as firms transfer some of the high costs to consumers. That being said, this justifies the case for the NBP to continue tightening monetary policy further at the coming MPC meetings.

Today, investors will have retail sales statistics for February on tap. Domestic consumptive dynamics remain relatively robust in Poland after retail sales rebounded to 20% in January, its fastest pace of growth since March 2004. Forecasts compiled by Bloomberg show that retail sales growth moderated in February to 16.6%. At this level, retail sales growth is still well above the long-term average which supports the domestic economic outlook in the near term.   ,

Czech Republic: The Czech Republic lifted all coronavirus restrictions imposed on travellers entering the country from fellow European Union member states with immediate effect on Friday. The new measures, which remove the need to be vaccinated against, recovered from or tested for the virus, will also apply to countries in the European Free Trade Association - Norway, Iceland, Liechtenstein and Switzerland. The Health Ministry in Prague said that travellers entering from outside the EU and EFTA will still be subject to the regulations currently in force. The country's tourism sector has been badly affected by the pandemic and the ensuing restrictions, which could begin to see its recovery gain traction in the months ahead. 

Forex: EM currencies end week on the defensive, but more stable     

South Africa: Public holiday.

Turkey: The USD-TRY bulls were in charge in the week's final trading session. The pair firmed by 0.67%, driven by the strong rebound in the greenback, mainly following the deterioration of the Russia-Ukraine scenario after peace talks failed to yield some serious progress. Additional tailwinds to the pair came from the domestic backyard as inflation gave no signs of abating, real interest rates remain negative and constant government pressure threatens CBRT independence.

Russia: Despite retreating into the end of the week, the RUB ended last week some 22.40% stronger in offshore markets. Friday's decline came as the CBR opted to keep its benchmark interest rate unchanged at 20%, as some speculators were positioned for another hike. Broadly speaking, the RUB remains highly vulnerable and very volatile, with thin liquidity conditions leading to extremely wide bid-ask spreads. It has started the new week off on the defensive, with news flow concerning developments in Ukraine and the West's reaction still the primary driver of the RUB.

Hungary: During the week's final trading session, the EUR-HUF bulls regained control, snapping to the upside out of the consolidatory trend that had formed in previous sessions. The cross advanced by more than 1.00% as risk appetite waned driven by doubts over the progress of peace talks between Ukraine and Russia, with the Kremlin suggesting that recent reports that a deal is near are wrong and that a lot of progress still needs to be made. This rally is unlikely to persist in the session ahead as investors could err on the side of caution ahead of the NBH MPC meeting slated for tomorrow.

Poland: On Friday, CEE currencies were on the defensive against the EUR as sentiment waned as Russia poured cold water on the ongoing negotiations with Ukraine. The Polish zloty depreciated by about 0.65% extending its bounce from the recent low to close the day at the 4.717/EUR mark. However, the broader picture shows that zloty bulls remained in control last week after ramping up gains of about 1.45%. These gains could be trimmed further in the coming session amid the high uncertainty over the Russia-Ukraine situation, increasing market volatility and triggering safe-haven bids.

Czech Republic: Last week, markets were gradually returning to normal after the initial turmoil as news of negotiations between Russia and Ukraine supported market sentiment. However, a lack of tangible progress in peace talks pressured markets. Central European currencies were offered on Friday, giving up their gains from the week to close on the back foot. The CZK has experienced some whipsaw price action in pre-market trade this morning, swinging between the 50DMA and the 100DMA at 24.670/EUR and 24.943/EUR, respectively. The CZK will likely extend its losses and target the 200DMA resistance at 25.220/EUR. Note that the EUR-CZK stochastics are on the verge of issuing a crossover buy signal.

Fixed Income: Russian coupon payment reportedly successful, but risks remain 

South Africa: Public holiday.

Turkey: Turkish USD-bonds attracted some relatively strong demand last week, with the yield curve bull-steepening sharply over the course of the five sessions. This followed as moves were especially pronounced at the short-end of the curve, with the 3-year tenor leading the charge with a cumulative 55bps decline. It remains to be seen whether this bullish momentum can be sustained, however, given strong global crosscurrents and headwinds.  

Russia: Fears of a Russian debt default have eased markedly since news broke that some Russian USD-denominated debt coupon payments had gone through last week. Technical difficulties were causing delays in payments to some creditors, but it seems as though technical default is off the table, for now. Risk of default down the line remains heightened, however, meaning CDS rates remain elevated relative to historical standards.

Hungary: Hungary's yield curve shifted lower last week as local bonds got some relief from subsiding risk aversion as ongoing Russia-Ukraine negotiations sprung hope for peace. A significant drop was recorded at the front end of the curve, with the 3yr tenor's yield dipping by more than 14bps. Meanwhile, the 5yr and 10yr HGBs saw yield fall by more than 12bps apiece. Although yields fell last week, they remain near multi-year highs as investors remain cautious amid the ongoing geopolitical risks, risk of further rate hikes by NBH and hawkish stance by the major central banks.

Poland: Bloomberg calculations using official data show that Poland sold $3.28bn worth of bonds this year as of March 17, with all debt issued locally. This is significantly lower than the $10.4bn sold during the same period last year as the government provided stimulus to support the economy after the outbreak of the COVID-19 virus and the implemented lockdown measures. It is worth mentioning that this is the lowest amount of debt sold for this period since 2011. This year's issuance is down 68% compared with the same period last year.

Tracking the performance in the CEE region, Polish bonds rallied last week supported by the improved risk sentiment amid hopes for peace. The curve shifted lower, with a more pronounced drop evident at the belly and long end of the curve. The 5yr POLGB yield fell more than 26bps, followed by the 10yr, which saw its yield drop more than 24bps, and the 2yr tenor down more than 17bps. Whether or not the rally in local bonds will persist in the coming week remains to be seen, given lingering geopolitical risks and high prospects that the NBP will continue hiking interest rates.

Czech Republic: Domestic bond yields moderated into the weekend, extending their trend lower since Tuesday to end the week 25bps to 35bps lower on the front-end and the belly of the curve. On the long-end, the 35yr bond yield fell by more than 35bps, resulting in the yield curve shifting broadly lower. Nonetheless, the yield curve remains inverted, with the 10v2 bond yield spread trading at -77bps after tumbling to a record low of -100bps two weeks ago. Investors have continued to monitor diplomatic efforts to end the almost month-long war. This backdrop and the surge in inflationary pressure that will hurt consumption and growth will keep the yield curve inverted.