Morning Note /

EMEA Daily: Russia's war with Ukraine, China's war with COVID fuel growth fears

  • Russian President Putin warns West of lightning-fast retaliation

  • Fiscal concerns over EU standoff hurt Hungarian bond market

  • ZAR tumble persists, depreciating all the way to R16.0000/$

Danny Greeff
Danny Greeff

Financial Market Analyst

Daron Hendricks
Daron Hendricks

Financial Market Analyst

ETM Analytics
28 April 2022
Published byETM Analytics

Russia's war with Ukraine, China's war with COVID keep growth concerns high

Talking Points: Russian President Putin warns West of lightning-fast retaliation

Global: The USD has continued to surge and defied all those who believed that America's huge twin deficits would hamper the USD. It might still do that in time, but for now, the focus remains on the monetary policy disparity between the US and its major trading partners. The EUR and the GBP remain firmly on the defensive against the USD as the former plunges towards 1.0500, while Sterling was last trading just above 1.2500 at writing. The proximity to the geopolitical tensions in Europe, the impact of the war on economic growth and the challenges the ECB and BoE will face, are now being factored into the price. It will be a challenging period all round, and while the Fed will be forced to reconsider its aggressive stance until it does so, the USD will enjoy support. The danger is that the Fed pushes too hard in too short a space of time and undermines financial markets and the global economy.

South Africa: Today, the local data card will be headlined by PPI stats for March, which are expected to reflect a further rise in supply-side inflation to 10.7% y/y. The elevated level of supply-side inflation will continue to contribute to broader price pressures in the economy, as some of the costs are transferred to consumers. Elevated commodity prices, high freight charges, and supply-side bottlenecks due to the lockdowns in China are expected to keep input prices elevated. Additionally, high oil prices are also a significant driver of current inflation, with petrol and diesel prices up more than 30% on an annual basis as a result of the Russia-Ukraine war.

Turkey: CBRT Governor Sahap Kavcioglu will present this year's second inflation report today. The central bank is expected to raise Turkey's inflation forecast after CPI growth rose to nearly three times its initial estimate. While new projections would typically give investors clues on prospective monetary policy, this is unlikely to be the case this time around given Turkey's unorthodox approach to monetary policy. Nevertheless, the inflation forecasts will still be interesting, and could help investors refine their inflation expectations.

Russia: Russian President Putin warned the West against further assistance to Ukraine, saying that it was only prolonging the war and the destruction. He also warned of a warned of lightning-fast retaliation if countries continue to interfere in Ukraine. Ukraine, meanwhile, again warned Europe that it should not rely only on Russia for oil and gas, although Russia denied blackmailing the EU. Tensions appear to be escalating, which will keep all of Eastern Europe on high alert.

Hungary: On Wednesday, investors digested the mixed signals from the NBH's policy statement after it delivered an expected 100bps rate hike. Moreover, they had to unpack the potential impact of the European Union's new rule of law, which has boosted its budgetary powers against Hungary – a move that could ultimately deny Hungary more than €40bn in EU funding. This would be a massive blow to Hungary's fiscus and adds to mounting fiscal concerns. Hungary on Wednesday became the first EU nation targeted by the conditionality mechanism, a legal tool to reprimand countries that violate the bloc's core values.

Poland: Despite Russia cutting off its gas exports to the country, Poland has doubled down against its neighbour by calling on EU states not to pay for Russian fuel in RUB. Poland has also called on the EU to impose a special duty mechanism on Russian gas and oil so that Russia won't be able to find new markets for its fuel. This push from Poland threatens to further dial up tensions with Russia, and we don't expect to see Poland backing down anytime soon. Following on from the initial shock of Russia's ban, focus has turned to what it could actually mean for Poland. The impact may not be as pronounced as initially expected, a result more than a decade of Poland trying to diversify its energy sources away from Russia. Poland will receive gas from the Baltic pipeline from Norway, but full capacity at that line is only expected from next year. Until then, Poland will need to rely on its stored gas as well as from allies to help fill the gaps. One downside, however, is that this all could slow the development of gas-powered power stations in Poland, which were being built to lessen its dependence on coal and help it cut carbon emissions.

Czech Republic: The Czech Republic's economy is estimated to have grown by 0.3% q/q and 4.3% y/y in Q1 2022, according to analysts polled by CTK. The relatively robust annual growth can be attributed mainly to a low base comparison, as the economy contracted in the same period a year ago. Overall, the economy struggled with high inflation and persistent problems in supply chains in Q1. The adverse effects of the Ukraine war will be felt from Q2 onwards. The Czech Statistical Office (CZSO) will release its preliminary GDP estimate for Q1 on Friday.

Fixed Income: Fiscal concerns over EU standoff hurt Hungarian bond market        

South Africa: Notwithstanding the depreciation in the ZAR on Tuesday, domestic bonds posted some gains, especially at the short end of the curve. This is not a market positioning for an aggressive phase of hiking by the SARB. It appears as though the SARB's general conservatism has prevented inflation from becoming a bigger problem than it already is. Add to that some weak growth in money supply that will prevent inflation from gaining substantive traction and investors might do well to consider the possibility that inflation surprises to the downside and that the SARB's tightening is far more moderate than first forecast.

Turkey: The Turkish USD-denominated yield curve continued its steepening trend on Wednesday. Yields moved in sympathy with their US Treasury counterparts yesterday, rising across the curve through the session. Moves were more pronounced at the long end, however,  with the short end remaining anchored given that the CBRT remains in no mood to tighten monetary policy despite runaway inflation Turkey. Looking ahead, the steepening trend is expected to persist in the near term, with the tightening of global financing conditions set to weigh on demand for risk assets.

Russia: Russian Finance Minister Anton Siluanov told reporters that the country might resume sales of sovereign RUB-denominated bonds next year if markets and inflation stabilise, adding that there are no plans for debt sales through this year. Siluanov also said that there are not yet any discussions about letting foreigners trade on the Moscow exchange, which will keep Russian assets relatively stable in the near term.  

Hungary: Fiscal concerns intensified yesterday after the EU triggered its new rule of law, which could deny Hungary €42bn in EU funding. This came on the back of mounting inflation concerns as the HUF extended its losing streak. Against this backdrop, it is unsurprising that HGB closed Wednesday's session on the back foot. Yields across the curve traded higher. For context, the 3yr and 10yr HGB yields rose by 2bps and 3bps to 7.03% and 6.78%, according to Bloomberg data.

Poland: Local bonds were under pressure yesterday, tracking currency weakness following the announcements that Russia would ban its exports of gas to Poland. Yields were up across the board on the day as a result, further entrenching the inversion seen along the curve. CDS spreads, meanwhile, have widened out once again, with the 5yr benchmark trading near 85.45bp, its highest since mid-March. The spread also remains not far off from its recent peaks of 97bp, although in general this shows that investors still assess the risk of a credit even as being relatively low. It is just that the cost of servicing foreign currency debt has risen owing to some PLN weakness.     

Czech Republic: CZK bonds traded in mixed fashion yesterday, with yields on the front-end of the curve rising slightly while those on the belly and the long-end of the curve fell modestly. Overall, the small moves in both directions kept the shape of the local yield curve relatively unchanged. Further rate hike pressure on the Czech central bank in the face of expectations of an economic slowdown exacerbated by the Ukraine war risks causing the yield curve to remain inverted for some time. The 10v2 bond yield spread has fallen to negative 103bps, just shy of its record low of negative 108bps at the beginning of the month. 

Forex: ZAR tumble persists, depreciating all the way to R16.0000/$   

South Africa: The USD-ZAR is poised to test the 16.0000 mark again today, with momentum still firmly to the topside. A sustained break of this resistance level would open the door to a move towards the January highs around 16.1000, after which the pair's November-2021 high of 16.3600 would be the target. However, much depends on whether prevailing USD strength can be sustained, with so much in the way of risk-off and Fed monetary tightening plans already priced in at current levels. In any case, exporters are again encouraged to use the current opportunity to lock in some attractive forward rates, as the move begins to look increasingly stretched.

Turkey: The TRY continued to trade with an impressive degree of resilience against a soaring USD, depreciating only 0.05% yesterday despite broad-based risk-off sentiment through the session. Of course, this is primarily a function of Turkish market controls aimed at keeping the exchange rate stable to curb runaway price pressures. Accordingly, and given the lack of free-market activity, the TRY looks set to remain resilient and continue consolidating in the sessions ahead.

Russia: The RUB extended its bull run on Wednesday, appreciating 1% to sub-73.00/$ levels after Russia upped the ante in a gas dispute with Europe by cutting supplies to Bulgaria and Poland. The RUB is also finding support from month-end tax payments, which are paid in RUB, while broader capital controls are ensuring a relatively stable market despite Western sanctions over the Ukraine war. More of the same is expected into the end of the week, with the RUB looking good for a test of 72.00/$.

Hungary: The HUF extended its losing streak on Wednesday, with the local currency being hit by the double-edged sword of concerns that Russia's decision to cut off gas deliveries to Poland and Bulgaria could have negative implications for Hungary and the possible implications of the EU's new budget rule of law. The EUR-HUF tested a break above the key 380.00 level yesterday. However, the move wasn't sustained, with the EUR-HUF closing the session 0.22% higher at 377.87, according to Bloomberg data. Note that this marked the fourth straight session of losses for the local unit, bringing the HUF's weekly losses so far to 1.62%. 

Poland: The EUR-PLN has steadied following its rally after Russia's ban on gas exports to Poland. The cross is holding above the 4.7000 mark as a result, and we could see it hold here into the weekend. Implied vol levels, however, are rising with the 1-week tenor up to 11.05%, its highest since the start of the month. We could see near-term tenors remain bid through the sessions ahead, especially with the 1-week now covering next week's MPC meeting. 

Czech Republic: The EUR-CZK closed yesterday on the back foot after failing to break above the 24.600 mark, while the EUR-USD slumped to a five year low following heightened geopolitical and economic growth concerns. Russia's energy move served as a reminder for traders focused on Central and Eastern Europe that the region's currencies still carry many risks. The EUR-CZK's 1-week implied vol benchmark rose considerably less than its peers, EUR-HUF and EUR-PLN yesterday, to trade around 4.7825%, 9.9975% and 10.5525%, respectively. It must be noted that the EUR-CZK 1—week implied vol covers the May monetary policy decision. While interest rate hikes should help support the region's currencies, the uncertainty regarding the extent of further monetary tightening will certainly boost FX volatility.