Morning Note /

EMEA Daily: Sentiment improves despite tightening global financing conditions

  • SA eases most of remaining COVID-19 restrictions, but stops short of ending state of disaster

  • ZAR continues to outperform ahead of this week's SARB policy update

  • Russian bonds recover as CBR intervenes in the market

Danny Greeff
Danny Greeff

Financial Market Analyst

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

Sentiment improves despite prospect of tightening global financing conditions

Talking Points: SA eases most of remaining COVID-19 restrictions, but stops short of ending state of disaster     

South Africa: CPI data for February scheduled for release today are expected to reflect a slight acceleration in both core inflation and headline inflation. Specifically, consensus expectations as per Bloomberg surveys are for core CPI growth to rise from 3.5% y/y to 3.6% y/y, and for headline CPI growth to rise from 5.7% y/y to 5.8% y/y. Regarding the outlook, ETM's proprietary indicators suggest that while headline inflation could threaten the upper limit of the SARB's 3%-6% target range in the near term, price pressures will likely moderate later this year as supply chain pressures ease and high base effects kick in. 

On a different note, investors will also be digesting President Ramaphosa's overnight pandemic address today. While the president did not do away with the national state of disaster, he did announce the easing of many of the remaining COVID-19 restrictions. Among those, citizens will no longer need to wear masks outdoors, events that require patrons to provide proof of immunisation or negative test results will be allowed to run up to 50% of capacity, and the number of people allowed to attend funerals doubled to 200. "Further easing of the remaining restrictions will require that we increase the rate of vaccination among South Africans," the president added, with only around 48% of adults currently vaccinated, and only 35% of people aged between 18 and 35 years jabbed at least once.

Turkey: The data calendar is thin today, with only consumer confidence statistics slated for release. Turkey's consumer confidence index fell from 73.2 in January to 71.2 in February. At this current level, consumer sentiment is anchored near the lowest level on record since Bloomberg started tracking the time series. The depressed levels of consumer confidence can be attributed to the rising cost of living, high inflation eroding household purchasing power, a weaker currency and political uncertainty. Given the above-mentioned factors, consumer confidence is likely to remain subdued in the coming months, and this will continue to weigh on the economic growth outlook.

Russia: Ukrainian President Zelensky confirmed that talks remained confrontational but were moving forward, as the West seeks to impose even more sanctions on Russia. There is likely enough on the table to allow for a cease-fire, although it is unclear that Russia will relent. The war from Russia's perspective is about gaining strategic advantage in the Donbas region and claiming the port of Mariupol. Although the fighting continues, so do the talks.

Regarding the data and events card for the day ahead, there are industrial output stats for February, PPI numbers for February, and CPI data for the week of 18 March scheduled for release. Furthermore, President Putin will hold a government meeting on infrastructure and housing construction, Foreign Minister Lavrov will speak at the Moscow State Institute of International Relations, and Deputy PM Novak will speak at the State Duma. Today's thus looks set to be a busy session, although the market's focus will likely remain on war developments in Ukraine.

Hungary: Prime Minister Viktor Orban appealed to the European Union to release the billions of euros in the blocked pandemic aid to help Hungary cope with the economic fallout from the war in Ukraine. The EU recovery fund approval for Hungary was delayed amid the allegations of the rule of law violations and graft concerns. In a letter to European Commission President Ursula von der Leyen seen by Bloomberg, PM Orban said that he wants to tap the loan portion of the EU Recovery and Resilience Facility and asked for flexibility in how the money is spent. Furthermore, Orban asked for the EU to scrap a funding metric that ties pandemic aid levels to economic growth rates. Access to the EUR7.2bn will allow Hungary to boost spending on defence, border control and refugee aid as the country copes with the inflow of more than 450k refugees. In exchange for the EU funding, PM Orban is offering to comply with the EU's country-specific recommendations, including taking steps to tackle corruption.

Today, the data card picks up current account balance statistics for Q4 on tap. Hungary's external position deteriorated significantly in the third quarter, with the current account deficit widening to reach EUR2.26bn, its highest shortfall since Q4 of 2008. Although market expectations are for the current account deficit to narrow, the country's external position will remain relatively weak, keeping the local currency under pressure. 

Poland: Data released yesterday by the National Bank of Poland showed that money supply growth surprised to the upside in February. Specifically, M3 money supply growth accelerated from a seven-month low of 7.7% y/y in January to 8.0% y/y in February, beating consensus expectations of a less pronounced increase to 7.8% estimated by economists surveyed by Bloomberg. Month-on-month, money supply growth rebounded from -1.2% to 1.2% during the same period under review. With Poland's monetary environment still relatively loose, this could bring with it an upside risk to the inflation outlook in the coming months.

Today, investors will be assessing Poland's latest jobless rate and consumer confidence figures. The Polish labour market remains relatively tight despite unemployment rising during the first month of 2022, supported by the further reopening of the economy, higher wages and recovering economic growth. The minimal slack in the labour market bodes favourably for economic growth. On the other hand, a tight labour market coupled with high wages poses an upside risk to the inflation outlook.

Czech Republic: While Australia, the United Kingdom, Canada, and the United States have all banned the purchase of Russian oil in response to its invasion of Ukraine, the European Union has yet to take a position on the matter. European member states will discuss proposals for such a ban in the coming days, and the mere fact that they will approve a proposal will contribute to an increase in global oil prices. However, according to Reuters, Germany and the Netherlands have warned against hasty bans. Germany, the EU's top user of Russian crude oil and the Netherlands, a key trading hub, argue that the EU could not cut its dependence on Russian supplies overnight. Stop the oil flow from Russia and large parts of Germany would grind to a halt. While the political debate on this issue continues, some customers in Europe have voluntarily given up Russian oil. They worry that failure to do so would damage their reputation.

Forex: ZAR continues to outperform ahead of this week's SARB policy update    

South Africa: The ZAR remained one of the star performers in EM FX markets after the long weekend, gaining 0.80% on Tuesday to close at a five-month high of R14.8300/$. This advance added to the broader ZAR bull trend, with the local unit still one of only a handful of EM currencies (mostly from LatAm) that have recorded gains against the USD year-to-date. This dynamic points to differentiated risk appetite in EM FX due to the varying impact of the Russia-Ukraine war, as well as support for currencies of central banks that prudently front-loaded rate hikes into the back-end of last year. Leading into today's local trading session, EM currencies are somewhat mixed against a stabilising USD, although the ZAR has continued where it left off yesterday, gaining in overnight trade to attempt another break of the 14.8000/$ mark. Following yesterday's break through previous year-to-date lows, momentum for the USD-ZAR is gaining to the downside. It also seems unlikely that the market will opt to book profit on the recent ZAR rally before the SARB's update tomorrow, meaning a strong attempt at 14.8000 could occur today. 

Turkey: The USD-TRY traded relatively flat for the second consecutive session yesterday despite rising risk aversion following the hawkish tone struck by the US Fed Chairman Powell. The steady performance in the pair remains a function of the FX interventions by the CBRT. The USD-TRY continues to consolidate below the 15.00 handle, the next resistance level. It is worth noting that options traders remain bearish against the TRY. The USD-TRY 1 and 3-month risk reversals are buoyant near record-high levels, highlighting greater demand for USD calls. The elevated level of bearish TRY bets is justified given the underlying weak macroeconomic fundamentals.

Russia: The USD-RUB continued to hover around the 104.00 mark yesterday, lacking any strong directional momentum as the market awaited progress in peace talks between Russia and Ukraine. The currency is finding some stability, although risks remain that the West could introduce more hard-hitting sanctions in the weeks ahead. That being said, it appears as though EU nations are unlikely to reach consensus on any sanctions on Russian oil, with that being the single biggest risk to the RUB at this time. Consolidation thus remains the order of the day for the time being, as the market awaits new developments to catalyse fresh directional impetus.

Hungary: It was another upbeat session for the Hungarian forint as it appreciated for the second consecutive day driven by the aggressive rate hike delivered by the NBH yesterday. The local unit strengthened by about 0.85% to end the day pivoted slightly north of the 370 mark, which is the hard line in the sand to the downside. Piercing below this level could potentially provide legs for the HUF to appreciate further in the coming sessions. However, rising USTs, stronger dollar due to the hawkish Fed and lingering geopolitical tension could place a lid on the HUF gains.

Poland: The bearish bias in the EUR-PLN remained entrenched on Tuesday as the cross retreated for the second consecutive session. Wagers that the central bank will continue tightening monetary policy amid the lingering inflation concerns continue to offer some support to the local currency. However, uncertainty over the Russia-Ukraine situation, keeping investors on edge, alongside the hawkish bent by the US Fed are key risk factors that continue to weigh on the local currency.  

Czech Republic: The CZK firmed slightly against the EUR yesterday, closing at 24.658/EUR after punching through the 50DMA resistance. There was a lack of economic data or market impulse from the external environment to sustain a move higher. Since the CNB stepped into the market on March 4, the currency has strengthened considerably, but now it appears to be due for a correction. 

Fixed Income: Russian bonds recover as CBR intervenes in the market 

South Africa: At yesterday's SAGB auction, demand dropped to a three-week low of R 10.910bn from R11.245bn in the week prior, pushing down the overall cover ratio to 2.80 from 2.88. The modest drop in demand suggests there may be some caution in the market ahead of the SARB rate decision on Thursday. Given the near-term inflation outlook, the SARB is expected to hike its Repo rate at the next meeting. However, further guidance on the tightening cycle path could generate volatility. The longer-dated R2044 accounted for the majority of the bids at R4.210bn, while demand was evenly spread for the R2030 and R2032. The R2044 attracted a cover ratio of 3.2, notably higher than the average of its last five auctions. Clearing yields were a mixed bag. While the R2030 and R2032 cleared 66bps and 39bps higher at 9.830% and 10.190%, respectively, that of the R2044 fell by 1bps. Meanwhile, spreads over the R186 were broadly narrower, indicative of a flattening bias.

Turkey: Turkish USD-denominated bonds came under some mild selling pressure on Tuesday,  with yields rising across the curve through the session. Moves were more pronounced at the long end of the curve, leading to a bear-flattening thereof on the day. This was consistent with the market's broader trend, which has seen the Turkish USD yield curve rise sharply over the last three weeks. The bias also remains to the topside going forward, as global financing conditions look set to continue tightening in the weeks ahead.

Russia: Russian bond yields came crashing down on Tuesday, as investors digested Russia's successful USD-bond coupon payments, and CBR interventions in the market supported a strong recovery. CBR purchases of OFZs have helped to stabilise prices and have provided extra liquidity to the market, and although the central bank has not disclosed the extent of its interventions, they appear to be large. The near-term outlook for the OFZ market thus depends on CBR interventions, although these actions may prevent investors from betting against OFZs and, in turn, add to downside momentum for yields.

Hungary: Interest in the three month T-bills improved, with demand arriving at HUF64.85bn versus HUF50.4bn seen last week. This prompted the AKK to sell HUF42.5bn of the discounted three-month T-bills, raising the original offer by HUF12.5bn. This generated a cover ratio of 1.52 compared with 1.68 a week ago. Average yield also increased, with the T-bills clearing at 5.68%, 11bps higher than the yield at the previous auction of bills a week earlier and 30bps over the secondary market benchmark. This increase in clearing yields alongside the high market uncertainty due to the ongoing war could have underpinned the strong demand in the bills.

Poland: Polish bonds lost more ground yesterday, taking cues from yield increases in the core markets as interest rate hike risks continue to increase amid central banks targeting inflation. In the core markets, the German (10yr) bund drifted higher by more than 4bps to reach 0.54%, its highest level since October 2018, while the comparable UST bond climbed to 2.3779%, flirting with levels last seen in May 2019. Zooming in on the local bond markets, the yield curve shifted higher, with a more pronounced jump seen at the belly of the curve. The 5yr tenor's yield jumped more than 18bps, followed by the 10yr tenor, which rose more than 16bps. 

Czech Republic: The focus remains on bond yields amid a global bond sell-off after hawkish remarks by US Fed Chairman Powell, where he left the door open for a 50bps hike to address inflation. Growing concerns of monetary-policy tightening, inflationary pressure and the war between Russia and Ukraine has turned investors' sentiment particularly weak and has kept bond markets under pressure. CZK bond yields rose between 15bps -20bps yesterday, with the 35yr bond yield rising more than 22bps on the session. Investors will have several speeches by central bankers to digest today, which may underscore how central banks remain committed to reducing the current level of inflation through the use of interest rate hikes. Following Fed Chair Jerome Powell's hawkish remarks, markets will be looking for signs of a more active approach against inflation.