Morning Note /

EMEA Daily: SA continues to outperform Eastern Europe on surging commodities

  • Oil prices continue to surge after the US bans Russian oil imports

  • PLN snaps losing streak after central bank rate hikes

  • Fitch downgrades Russian debt to C on risk of imminent default

Danny Greeff
Danny Greeff

Financial Market Analyst

Edmond Muzinda
Takudzwa Ndawona
Daron Hendricks
ETM Analytics
9 March 2022
Published byETM Analytics

SA continues to outperform Eastern Europe on surging commodities

Talking Points: Oil prices continue to surge after the US bans Russian oil imports    

South Africa: GDP data released yesterday showed SA's economic recovery rebounded in line with expectations in the final quarter of last year. SA recorded growth rates of 1.2% q/q and 1.7% y/y in Q4, taking the 2021 growth rate to a 14-year high of 4.9% as the economy rebounded from the pandemic-induced slump of the year before. That being said, SA's GDP is still some way off pre-pandemic levels, and is currently at a similar level to that of the third quarter of 2017. The economy consistently needs to grow at a higher rate to make material headway in addressing SA's unemployment and fiscal problems, and barring the acceleration of reforms that crowd in the private sector, ease labour-market regulations, and remove red tape, this will remain a pipe dream.

Then there is the matter of Eskom and its inability to supply the country with a constant stream of electricity. It was perhaps fitting that shortly after Stats SA published the GDP data yesterday, Eskom announced Stage 2 loadshedding would be extended into the weekend (and since then, Stage 4 loadshedding has been announced). The outlook for the rest of the year is also looking increasingly bleak as oil and coal prices surge, since Eskom's fleet is predominantly coal-fired and it uses diesel-fuelled turbines as an emergency measure when its main power sources fail. CFO Calib Cassim noted yesterday that Eskom foresees almost R9bn in costs to run its diesel-fuelled turbines, which is significantly higher the R1bn it usually budgets for.

Turkey: The spillover effects of Russia's invasion of Ukraine have begun spreading to store shelves as global supplies tighten further and food prices edge higher. Worries about surging sunflower oil have triggered heavy buying in Turkey. The country faces a shortage of sunflower oil supplies due to 18 Turkish commercial import ships stuck at the Sea of Azov, the north-eastern tip of the Black Sea. With the current supplies expected to last only to mid-April, the ongoing scramble could drive oil prices higher. Turkey's cost of living is already high as inflation is running at a 20-year high. The persistent high food and energy prices could trigger protests and political unrest which bodes unfavourably for President Erdogan who is facing an election next year.

Russia: Note that the price of Brent crude is back above the $130/barrel mark this morning after the US banned the importation of Russian oil, and the UK pledged to phase out Russian oil imports over the course of the year. Since just 3% of US and UK crude oil imports come from Russia, the ultimate impact on Moscow will be minimal. Nevertheless, the Biden and Johnson administrations will leverage off their announcements as much as possible, while the financial market response holds very real consequences for ordinary households.

The Russian data card picks up today, with CPI numbers for February scheduled for release. The data will provide only a glimpse of the price shock on the way for an economy in crisis, however, and will hold limited market-moving potential. Weekly CPI stats for the week of 4 March may provide additional insights, though, and are expected to reflect broken supply chains and soaring import prices due to the RUB's recent war-induced tumble.

Hungary: The data calendar picks up today with CPI and NBH MPC minutes slated for release. Hungary's consumer price inflation reached its fastest pace of growth in more than fourteen years after accelerating to 7.9% during the first month of the year. Note headline inflation has been stuck above the NBH's official target of 2% to 4% for the tenth consecutive month, supported by recovering domestic consumption, tight labour market, rising wages and supply-side constraints. Market expectations are for inflation to continue edging higher in February. The above-mentioned factors, alongside the surge in global crude oil prices and weak local currency, underpin the persistent price growth. Meanwhile, the NBH MPC minutes will give further insight into the monetary policy direction and the central bank's forward guidance.

Poland: The National Bank of Poland surprised the market by hiking the base rate by 75bps to 3.50%, its highest level since February 2013. The aggressive rate hike trounced consensus expectations of a less pronounced increase of 50bps and marked the sixth consecutive meeting that the central bank has tightened monetary policy. The rate hike decision underscores the central bank's need to support the zloty and tame inflation expectations due to surging commodity prices fuelled by Russia's invasion of Ukraine.

Czech Republic: Unemployment in the Czech Republic fell to 3.5% in February, which is a tenth of a percentage point less than in January. There were 263,433 job seekers, about 3,600 fewer than in the previous month. February's data highlights the problem of labour shortages instead of the number of people out of work. However, further developments in the labour market are uncertain going forward due to the conflict in Ukraine with a large number of refugees arriving in Central and Eastern Europe (CEE). The geopolitical situation will weigh on the Czech economy, and, as a result, unemployment could rise, although a surplus of job vacancies will mitigate this.  

Forex: PLN snaps losing streak after central bank rate hikes

South Africa: As oil prices continue to rise, so do other commodities amid fears of shortages due to the Russia-Ukraine war. This is bolstering the ZAR's shine, with the local unit holding resiliently below the R15.4000/$ mark despite broader risk-off trading conditions and local concerns over loadshedding and its impact on economic growth. Investors continue to use the ZAR as a proxy for commodity exposure, while recent progress on the local reform front and the high real yields on offer are also driving capital spill-overs into SA.

Turkey: The USD-TRY bullish bias remains entrenched as the pair extend its rally to seven consecutive sessions. A 0.82% advance yesterday was driven by the deepening risk aversion as soaring commodity prices fuel inflation concerns, and credit default swaps surged to the highest based on closing prices going back to 2008. The topside momentum has continued ahead of the local open, with the USD-TRY firming by 0.46% at the time of writing to reach a fresh record high of 14.5463. With the geopolitical tensions showing no signs of abating alongside underlying weak macroeconomic fundamentals, the TRY will likely remain under selling pressure in the coming sessions.

Russia: After a slight recovery on Tuesday, the the RUB is once again on the defensive this morning in offshore markets. Liquidity conditions are extremely thin, however, leading to severe intraday price swings as bid-ask spreads widen. This makes the RUB's outlook very uncertain, although the balance of risks is tilted towards weakness as the Ukraine war becomings increasingly drawn out. News that the US and the UK are targeting Russian oil markets with sanctions will also embolden the bears, making it all the more difficult for the CBR's interventions to have any material effect.

Hungary: The EUR-HUF took a breather yesterday as the central bank signalled that they will tighten monetary policy further after raising the interest rate corridor. The central bank also struck a more hawkish tone as they warned that they were ready to act to shore up markets. Against this backdrop, the cross slipped by more than 2.00%, bringing the six-day winning streak to a halt. Whether or not the pullback will continue remains to be seen, given that investor sentiment remains sour amid heightened geopolitical risks.

Poland: The Polish zloty snapped the six consecutive days of depreciating after the central bank delivered a more than expected rate hike. The local unit rebounded by about 1.82%, erasing most of the losses realised in the previous session and closed the day below the 4.90 mark. Ahead of the local open, the EUR-PLN is trading slightly bearish after being subject to some whipsaw action. With geopolitical tensions sapping investor sentiment and keeping safe haven demand bid, the pullback in the cross is likely to be limited in the session ahead.  

Czech Republic: The CZK fluctuated between intraday lows of 25.831/EUR and highs of 25.074/EUR yesterday, before finishing on a higher note at 25.478/EUR, off its nine-month low. The local currency is being supported by the central bank's intervention in the spot market, which is preventing it from falling below 26.00/EUR. Given the large reserves and the extraordinary circumstances, the CNB may continue to intervene and support the CZK. The local currency is trading on the front foot this morning at 25.464/EUR, and now that the underlying bias is beginning to turn bullish, the CZK might target an array of technical indicators, namely the 100-and-200DMAs, in the coming sessions. Nonetheless, given the uncertainty and ongoing geopolitical developments, it is prudent not to get overly bullish on the CZK.

Fixed Income: Fitch downgrades Russian debt to C on risk of imminent default  

South Africa: SAGBs have been coming under increasing pressure with the longer-dated R2048 yield rising sharply. Its yield has risen to 11.05% from levels closer to 10.20% seen through February. The front end is also selling off with the R186 yield up to 8.80% - its highest level since May 2020. Possible buying opportunity for those seeking entry points. The repo rate is unlikely to be that high in the absence of a complete deterioration in SA's inflation risks, which suggests that market mispricing could be occurring as Europe's capital markets remain stressed.

Rising oil prices and the risk of an inflation spike in SA seem to be the major drivers of FRA paying interest. The 3x6 is pricing in roughly 100bp worth of rate hike risk, while the 9x12 is pricing in well over 200bp. A potential receiving opportunity when considering that the SARB remains mindful of growth risks.

Turkey: Turkish bonds remained under pressure on Tuesday, with yields rising across the curve as investors continued to rotate out of the market. This is due to risk aversion over the Russia-Ukraine war, and the impact the consequent surge in commodity prices could have on Turkey's already-elevated inflation rate and economy. Moves were especially pronounced at the short end of the curve, where the 2-year led the charge higher by adding more than 75bps to its yield through the session.  

Russia: Russian debt was downgraded to the second-lowest level by Fitch Ratings yesterday, which said bond default was "imminent" as a result of sanctions imposed on Russia over its invasion of Ukraine and its increasing economic, financial, and political isolation. With this move, Fitch cut Russia's credit rating by six notches to C, just one notch above borrowers who have already been driven into default. Russia's default could come as soon as mid-April, which will mark the end of the 30-day grace period on coupon payments the Russian government owes on USD bonds due in 2023 and 2043.

Hungary: The AKK returned to the markets yesterday selling three-month T-bills. Interest in the T-bills auction declined yesterday, with total bids arriving at HUF88.9bn compared with HUF103.79bn a week ago. However, the AKK managed to sell HUF30.0bn of discount three-month T-bills, matching the original offer. As a result, the cover ratio increased to 2.96 versus 2.50 seen a week prior. Clearing yields also increased by 72bp higher than the yield at the previous auction of the bills one week earlier and 40bps over the secondary market benchmark to clear at 5.57%. Although demand in the T-bills has fallen, it remains relatively strong as investors opt for shorter-dated assets given the market uncertainty due to the ongoing geopolitical crisis and the interest rate risks being priced in the market.

Poland: The Polish swap curve remains deeply inverted as investors have remained cautious and want to protect themselves from the looming interest rate risks. Central banks look to tighten policy rates aggressively to help stem the increased inflation pressures brought about by the surging commodity prices. Although the negative 10V2 spread has compressed slightly, it remains near levels that were seen in early 2002. This will likely remain the case going forward, given that the oil outlook is still bullish as the US looks to ban Russian oil imports, which will drive fuel prices and inflation higher while weighing on the longer-term growth outlook. 

Czech Republic: Yield premiums on Czech bonds and the CDS spreads, extended their advance due to the geopolitical risks and the potential ramification for parts of Europe. The 5yr US CDS spread widened by almost 11bps in the past nine days and is the highest since May 2020. There is the risk of the spread widening further in the coming weeks as geopolitical tensions continue to rise. Still, this is more a barometer for risk than it is about chances of default, with the CZK CDS the second-lowest out of twenty-one EM's tracked by Bloomberg.