Morning Note /

EMEA Daily: Russian troops regather and continue to shell key Ukraine cities

  • Talking Points: SA announces temporary fuel levy break, PMI figures out for CEE countries

  • Forex: ZAR unable to sustain its gains ahead of Moody’s review

  • Fixed Income: Russia continues to avoid default, making coupon and principal payments

Lloyd Miller
Lloyd Miller

Head of Developed Markets and Latin America Research

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

Talking Points: SA announces temporary fuel levy break, PMI figures out for CEE countries

South Africa: It has been a busy week with several key developments. News that the SA's government announced a reduction in the fuel levy comes as a significant relief. As of 4 April, the petrol price will contain R1.50/litre less in tax, at least for the next 1-2 months. Finance Minister Godongwana has said that "The intention of the temporary reduction of the general fuel levy is to support a phasing in [of] the fuel price increases that we are expecting in the short term. This will go some way in assisting South Africans to adjust to the new reality,".

·The short-term tax relief is nevertheless welcome to consumers and will moderate what would have been a nearly R2 hike in the fuel price in April. Consumers can now expect a roughly 25-30 cent hike when considering average ZAR and oil levels in March. It is estimated that it will reduce government revenue by around R6bn if maintained over the next two months. The impact will however not impact the fiscus as the amount will be funded out of the sales of strategic crude oil reserves.

The major implication is towards inflation which will be a little lower in the near term. Given non-fuel inflation at 4.4% y/y in February, the upside risks to inflation have partially abated, for now. Some extrapolation suggests that headline CPI (including energy) is now likely to range 5.2-5.5% in the next three months, while the SARB may need to lower its own CPI forecast. This will only apply for as long as the reduced fuel levy lasts vs the backdrop of the oil price. Should oil prices remain elevated, the likelihood is that this action only serves to delay the jump in the fuel price and does not prevent it from ever occurring. One could even argue that in the worst-case scenario where oil prices surge again, that the jump in fuel prices from June onwards could be even greater than the current saving in the fuel levy and so one must be careful not to believe that this has changed the inflation or rate hike trajectory indefinitely.

Turkey: Today's data calendar is light, with only the S&P Global/ICI Turkey Manufacturing PMI on the tap. This reading will give an update on the health of the productive sector of the economy. The PMI gauge fell in the first two months of this year to reach 50.4, its lowest level since May last year, as the sector grapples with the soaring inflation in Turkey, eroding the purchasing power of households and the weaker local currency, making imported resources more expensive. This trend will likely persist in the coming months, aided by the lingering supply-side challenges and rising global commodity prices. A further drop in the PMI gauge will likely weigh on the economy in the near term..

Russia: Today, Russia has set the deadline by which EU countries will need to pay for their gas in roubles or face having supplies cut. Negotiations continue. The move has helped the RUB recover smartly and boosted overall liquidity in the beleaguered currency. It is a strategically smart move by Putin, knowing full well that the EU cannot keep its production schedule without the energy imports from Russia and will generate artificial demand for RUB. Meanwhile, although Russian troops have held positions and continued shelling around Kyiv, Russian troops have vacated the area around Chernobyl. Although there are some early signs of de-escalation, many advisors are warning that this is offering Russia a chance to regroup, re-arm and re-strategise their advances

Hungary: Headlining the data calendar are Hungary's trade balance and the manufacturing PMI readings. The latter rebounded during the first month of 2022 to 53.20, extending its sequence of expansion to eleven consecutive months. This suggests that the manufacturing sector remains relatively healthy, which should help support economic growth in the near term. However, the performance in the sector is likely to stall in March on the back of the rising global commodity prices, the impact of the Ukraine war, and lingering supply-side bottlenecks.

With only two days away from the general elections, political news will be front and centre of investor focus. Hungarian opposition parties demand the immediate destruction of vote-by-mail slips after many of them were found dumped and partially burned in an illegal landfill near Sfantu Gheorghe in Romania. The united opposition members noted that what had happened to mailed votes eroded confidence in fair elections and put ethnic Hungarians in a humiliating position. Therefore, they are asking for all mail-in ballots from abroad to be eliminated amid fears that they could have been manipulated. However, the ruling party is likely to contest this as they won 96% of the mail-in ballot in the last general election in 2018..

Poland: Poland's data card heats up today, with S&P Global Manufacturing PMI and CPI releases on tap. The former remained buoyed above the 50-neutral mark (which separates expansion and contraction) for the twentieth consecutive month in Feb, suggesting that the manufacturing sector is fairly robust. The strong performance of the manufacturing sector comes on the back of recovering global and domestic demand and further easing of lockdown restrictions. Although the PMI gauge is expected to remain above the 50-mark for March, there are downside risks present. These include supply-side constraints, high global commodity and freight prices, and shortages of raw materials, which could all detract from the manufacturing sector's performance.

Investors will also be assessing the preliminary CPI statistic for March. Forecasts compiled by Bloomberg show that consumer price inflation increased in March, likely underpinned by the soaring energy and food prices fanned by the ongoing Russia-Ukraine crisis. Notwithstanding the slowdown in January, headline inflation remains at a more than two-decade high and there are risks that it could accelerate further. Looking ahead, the risk to the inflation outlook is skewed to the upside amid the persistent global supply chain problems, recovering domestic demand, high wages and tightening labour market. This corroborates the case for the NBP to continue tightening policy further to try temper the elevated inflation expectations..

Czech Republic: The Czech Republic’s economy grew by 0.8% q/q in Q4, which was lower than the preliminary reading of 0.9% q/q. On a y/y basis, the final GDP reading remained unchanged at 3.6% in Q4 and compared with a growth of 3.5% in Q3. These figures would not have moved the local market, but the central bank’s latest forecast published after the central bank rate decision raises some concerns for the year ahead. The Czech National Bank (CNB) winter forecast pencilled in the economy growing by around 3% this year and the next, but the war in Ukraine will reduce expected economic growth roughly to one-half of that figure.

A separate data release yesterday showed M2 money supply slowing in February, coming in at 6.1% y/y from 6.9% y/y in the previous month. The latest reading marked eight consecutive monthly declines and returned to levels last seen in April 2019. The Czech Republic’s tight monetary environment and weak macroeconomic backdrop have made households and businesses hesitant to take on additional credit. On balance, there is less room for cost-push inflation to have a lasting effect on inflation once the dust settles around the Russia-Ukraine war..

Forex: ZAR unable to sustain its gains ahead of Moody’s review

South Africa: Beyond the current geopolitical risks, expectations of a strong payrolls number may also be part of the reason the ZAR was unable to hold on to yesterday's attempts to test 14.4000. Although it is too soon to call an end to the current phase of ZAR appreciation, a strong US labour market reading will likely prevent the ZAR from extending its gains into the weekend. It offered investors the perfect justification to lock in profits from any short USD positions this week, while some uncertainty ahead of the Moody's review will have done the same. Consolidation around current levels is therefore plausible, while direction through the week ahead could be taken from today's data should there be any surprise.

Turkey: In the final trading session of the month, the USD-TRY remained in a consolidatory trend. Pulling back the lens, the pair extended its gains to seven consecutive months after rallying by about 5.97% in March. The continued advance in the pair is underpinned by the underlying weak macroeconomic fundamentals, global risk aversion due to the Ukraine war and more hawkish signals from the US Fed. In the coming month, the bias is likely to remain skewed to the upside, should the CBRT not shift its monetary policy to deal with inflation and support the local currency.

Russia: Bloomberg data show that the USD-RUB is trading just above the 81.00 mark. As we noted above, it is being artificially lowered by Russia's insistence that Europe pay for its gas in RUB. This strength for the RUB may last over the near term, but it will eventually give way and Russia's massive economic problems will slowly start to take precedence and drive the pair once again.

Hungary: It was another uneventful session for the EUR-HUF on Thursday as it traded in a consolidative fashion just above the 50-SMA (366.2581), which is the crucial support. Investors appear to be searching for a fresh catalyst to provide some directional guidance. The local data calendar, US jobs report, and the ongoing situation between Russia and Ukraine will be considered as catalysts that could provide further directional guidance.

Poland: The EUR-PLN halted its slide on Thursday as investors exercised caution to continue to assess developments over the Russia-Ukraine situation. Intraday, the pair firmed by about 0.31%, erasing more than half of the previous session's losses. Investors are also opting for the sideline as they wait for the CPI data slated for release later today. Should the reading match or better market expectations, this could see the cross resume its march south amid dialled up wagers for more rate hikes by the central bank to try and bring inflation under control. . .

Czech Republic: The EUR-CZK fell further yesterday, sliding below the 24.400 mark to post an intraday low of 24.352 but soon unwound some of its losses after the rate announcement as some investors had expected an even bigger rate increase. The pair closed the session at 24.402, with a monthly loss of 4.2%. This morning, the EUR-CZK is trading flat around the 24.400 mark as it awaits further impetus from today’s data card and Russia-Ukraine peace talks as the rate hike offered little support to the CZK bulls. Nonetheless, the EUR-CZK’s underlying bias remains bearish.

Fixed Income: Russia continues to avoid default, making coupon and principal payments

South Africa: With R186 outperforming the R2048-R186 spread has risen to 241bp from levels closer to 210bp in the recent past. The market seems to be going through a steepener phase, likely reflective of profit taking after a strong bull run in March. R186 outperformance suggests foreign interest might be picking up. FRA: FRA rates have been received yet still remain overpriced for the SARB guidance and stand as a marker of a market that continues to fret about US inflation risk. Domestic factors remain mixed (both inflationary and disinflationary), which should limit the SARB's willingness to follow the Fed into significantly tighter monetary policy. Therefore, the long end represents a receiving opportunity with SARB likely to slow in its policy tightening into 2023.

Turkey: Turkish USD-denominated bonds were on the front foot again yesterday, firming across the board which steepened out the curve a little bit. Yields are still elevated, however, while the 5yr CDS spread is trading well north of 500bp, suggesting that investors still see signs of longer-term financial distress. The spread has narrowed from levels above 700bp earlier this year, but we don't see much scope for it to return to levels seen before the central bank started cutting rates.

Russia: Russia has evaded a technical default once again with JP Morgan yesterday processing coupon payments for one its dollar bonds. The payment also included some principal amounts. Russia has also repaid a dollar bond that matures on 4 April, with the Fin Ministry offering to buy back the debt in RUB. These payments may continue for now and prevent the country from entering default, but for how long this will last is questionable. Russian accounts are still being blocked and this will continue to make payments difficult and slow.

Hungary: In yesterday's regular auction, the AKK sold a combined HUF80.0bn worth of 12-month T-bills, 5yr and 7yr floaters, HUF10bn above the original offer. This comes after total demand reached HUF118.04bn. Zooming in on individual tenors, appetite was strong for the 7yr floating-rate bond after primary dealers bid HUF76.26bn which is higher than the HUF49.7bn on March 17. Given the pick up in demand, the AKK was prompted to sell HUF55bn, HUF30bn above plan. Investors also favoured the 5yr floating rate bond, with demand arriving at HUF24.66bn, and the agency sold HUF15.0bn, matching the initial plan. Lastly, demand for 12-month T-bills disappointed, coming in at HUF17.12bn, prompting the AKK to sell HUF10bn, cutting its HUF30bn original offer. However, clearing yields for the T-bills increased by 21bps compared to levels seen two weeks earlier when the bills were sold to clear at 6.05%. During the non-competitive tender after the auction, the AKK sold a further HUF1.6bn of the 5yr floating-rate bonds and HUF17.2bn of the 7yr floating-rate bonds..

Poland: The Finance Ministry revealed that Poland plans to offer PLN20bn–35bn at 4–5 regular bond auctions and 1-2 switch auctions in the second quarter. In the coming month, the government will conduct two auctions on the 12th and 21st, where they will offer PLN2bn-4bn and PLN3bn-8bn, respectively.

Foreign holdings of the domestic debt fell by PLN0.2bn or 15.3% of the total in February to PLN127.1bn, while domestic banks increased their stakes by PLN4.2bn to 454.6bn. The marginal drop in the foreign holdings of Polish Treasury papers came despite the fallout between Russia and Ukraine, which triggered a rotation toward safe-haven assets. It is worth noting that the drop in foreign holding of domestic debt reduces the country's vulnerability to external shocks, but can be a valuable source of foreign flows.

Czech Republic: Swap rates were paid higher yesterday as the central bank signalled that further interest rate hikes would come as soaring inflation overshadows risks to the economy from the war in Ukraine. The CNB Governor Jiri Rusnok stated that the board also debated a 75bps rate hike instead of a 50bps hike delivered yesterday but agreed to wait for more data and its next quarterly forecast. With the CNB looking to restore price stability, which is now a priority, swaps are likely to be paid higher in the near term. Easing oil prices may help reduce some of the topside bias.