Morning Note /

EMEA Daily: Surging oil prices trigger fear of global stagflation

  • Western powers considering banning Russian oil imports

  • EM currencies under pressure amid global stagflation concerns

  • Inflation fears to keep bond markets under pressure amid

Danny Greeff
Danny Greeff

Financial Market Analyst

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

Surging oil prices trigger fear of global stagflation 

Talking Points: Western powers considering banning Russian oil imports    

South Africa: This week, South Africa’s investment community will get a full data card while the offshore markets remain volatile due to European geopolitical risks. Rising oil prices remain a core concern for SA’s consumers, who are looking at oil prices that, if sustained through March, will lead to a 100% increase in the fuel import cost component of the fuel price by the end of March, which would then roll into CPI in April. As the government adds around R8.50 to every litre, which was not increased in the budget, and while fuel counts for around 4-5% of the average household spend, the fuel price could add around 300bp to current inflation rates in due course, accelerating from 150bp or so at present. This suggests that transport inflation could accelerate into Q2, which challenges the current narrative of compressing inflation risk.

Turkey: The data calendar is light today with only the cash budget balance figures on tap. Turkey’s fiscal situation remained under pressure during the first month of the year, despite the deficit recording an improvement. The cash budget deficit narrowed from a record shortfall of TRY92.1bn in December to -TRY37.8bn. With the monetary authority completing distributing the bulk of its profit and reserves funds to the government now, we could see the cash budget deficit compress further for February. However, fundamentally, Turkey’s fiscal dynamics remains fairly weak, posing another headwind to the local currency in addition to soaring inflation and weakening economic fundamentals.

Russia: Global oil prices have surged to levels last seen in 2008 after the US, Japan, and European nations said they were considering banning Russian crude imports. While cutting Russian oil off from global markets would certainly deal a significant blow to Russia’s economy and, in turn, also President Putin’s popularity in Moscow, it would likely also exert extreme stagflationary pressures on a global economy still smarting from the effects of the COVID-19 pandemic. The recent surge in oil prices also highlights the need for a global solution to the Russia-Ukraine war.  It has already progressed far beyond any previous wars like Iraq, Afghanistan, Libya, and others whose trade linkages with the world were much smaller. Unlike these nations, Russia is also a global military (and nuclear) superpower, and it may be a dangerous move for the US and its allies to cut off its economy’s lifeblood and force it into a corner.

Hungary: It is a quiet start to the new week in terms of data releases, and investors will focus on the ongoing geopolitical developments and broader macroeconomic themes for guidance. Hungarian Prime Minister Viktor Orban told the local radio that the nation’s economy will also be impacted by sanctions that the European Union imposed on Russia. Orban said that “sanctions have a price as it is a double-edged weapon” and “Hungary will pay the price in the short term”. The PM cited the NBH’s withdrawal of the license of Sberbank’s unit after the ECB ordered its closure which saw many clients and companies losing money as one of the first direct consequences of the sanctions. The other factor that the central bank and government will have to address is surging energy prices, fuelling additional inflation pressures. This suggests that the market could see more regulated utilities price scheme.

Poland: In a bid to try and shield companies that may be impacted by the war in neighbouring Ukraine, the Polish state development fund (PFR) is preparing to launch a new support program. During an interview, the fund’s head Pawel Bory said that the state fund is already helping companies in regions close to the border as it sees the impact on tourism and is also involved in building IT infrastructure that would streamline aid to refugees fleeing from Ukraine. While Polish exports to Russia are limited, the fund is also monitoring the situation for exporters as selected industries may be vulnerable to conflict and sanctions.

Czech Republic: In the way of economic data today is average real monthly wage data for Q4. The growth of wages in the Czech Republic likely slowed slightly in Q4, but it should remain around the 5% y/y mark, following a rise of 5.7% y/y in Q3. However, after considering inflation, which rose sharply at the end of last year, earnings are estimated to have contacted. Economists expect the average wage to have declined by 0.7% y/y following a rise of 1.5% y/y in Q3. High inflation has already played a major role in the economy in Q4, and the rapid rise in consumer prices this year will negatively impact real wage growth. Given the current accumulation of pro-inflation risks, it is almost certain that the decline in real wages will be significantly more profound this year than in 2012 and 2013, and unfortunately, the possibility of weak economic growth or even a recession is also increasing.

Forex: EM currencies under pressure amid global stagflation concerns

South Africa: While skyrocketing oil prices have triggered risk-off trade this morning, note that the ZAR is holding up very well and outperforming its EM peers this morning. The USD-ZAR rejected higher prices overnight, with the pair hovering comfortably beneath its 50-session moving average at 15.4000. With higher commodity prices bolstering SA’s terms of trade, the ZAR remains a good hedge against the Russia-Ukrainian war. Therefore, while it may seem obvious at face value that the ZAR should depreciate due to a rotation from risk, foreigners may continue to use the local unit as a good proxy for commodity exposure, and the ZAR may continue to impress relative to the rest of EM.

Turkey: The USD-TRY bulls remained in control for the fourth consecutive session Friday as the geopolitical crisis continued to roil global markets. Broad-based dollar strengthening after a higher than expected jobs data, which raised speculation that the US Fed will hike interest rates this month, coupled with geopolitics pushed the pair higher, gaining about 0.47% to reach the 14.200 mark. Ahead of the local open, the USD-TRY bulls remain in control as the conflict in Ukraine has deepened amid mounting calls for harsher sanctions against Russia. This should keep the bullish bias intact for now.

Russia: After a dismal performance last week, the RUB has opened the new week at a new record low amid concerns over a potential oil embargo that holds the potential to crussh Russia’s economy. A ban on Russian oil imports is being discussed by the US, Europe, and Japan, and would hit Russia where it hurts most. Whether such a ban is politically pallatable for these nations, given the stagflationary affect it is likely to have, remains to be seen, but the mere suggestion that they are considering such a ban will keep the RUB vulnurable in the near term.

Hungary: It was another downbeat session for the HUF, which tumbled for the fifth consecutive session due to the risk-off sentiment that has dominated global markets. The local currency weakened by 1.63% on Friday to reach a fresh record low of 387.38/EUR. Looking at the broader performance, the HUF lost 6.13% last week against the EUR, making it the second-worst currency amongst the twenty-four emerging market currencies that Bloomberg tracks. With the geopolitical risks showing no signs of abating, the forint bearish bias is likely to remain entrenched, stoking the NBH to join other CEE peers in intervening in the FX market and propping the local currency.  

Poland: On Friday, the Polish zloty remained under selling pressures, the NBP FX intervention notwithstanding. The local currency tumbled by about 2.06% against the EUR, extending its losing streak to five consecutive sessions to reach a fresh record low of 4.8976 mark since Bloomberg started tracking the time series. The sell-off in the PLN continues as investor sentiment continues to sour amid the growing fallout from Russia’s invasion of Ukraine. Additional headwinds also stem from the broad-based dollar strengthening following the stronger than expected US jobs report. The bearish bias remains entrenched in the early morning session, with the PLN depreciating further by 0.69% at the time of writing. Geopolitical tensions remain front and centre of the market in the session ahead, and we could see further PLN weakness, pushing the central bank to keep up its interventions.

Czech Republic: Given the extent of the sell-off in the CZK, the Czech National Bank (CNB) joined the Polish central bank in intervening in the spot market on Friday to prop up its currency, as central European policymakers try to shore up markets coming under heavy pressure after Russia's invasion of Ukraine. It is the latest sign that the authorities are uncomfortable with the further weakening of the CZK. The local currency strengthened against the EUR on Friday, defying another day of heavy selling in the region, to close the week at 25.687/EUR. Expect support to emerge around 25.500/EUR and a strong support at 25.240/EUR. Poland’s zloty (PLN) and Hungary’s forint (HUF) extended losses as concerns over Russia’s invasion of Ukraine escalate. The CZK is down 3.2% against the EUR since the war began, compared to 4% for the PLN and 4.4% for the HUF. Looking further back, the CZK outperformance is even more evident. The currency is up 2.3% against the EUR in the past 12 months, vs a 5.7% drop in the HUF and a 6.8% slide for the PLN.

Fixed Income: Inflation fears to keep bond markets under pressure amid 

South Africa: SAGBs have been subject to clear selling pressure as a sign that offshore concerns are spilling over into SA asset markets. JSE data suggests that foreign investors have sold just over $2bn in March so far, which compares with $918mn in February. Note that the data does not directly correlate with sales of SAGBs as reflected in NT data for several reasons. The long end of the curve is testing its highest yields since early Jan with the R2044 notably at 10.814% at the close on Friday while the R186 has been squeezed even higher to its highest levels since November. A new entry point for longs may soon emerge as current economic trends favour continued support of fiscal revenues.

Turkey: The Turkish yield curve steepened throughout last week, with long-end yields rising sharply amid global concerns over the ongoing Russia-Ukraine war. More of the same is expected in the near term, with risk assets coming under the gun at the early stages of this week due to soaring oil prices that increasingly point to severe global stagflationary pressures in the months ahead. With inflation already a major problem in Turkey, the prospect of runaway oil prices will likely detract even more from Turkish bonds and drive a further rotation out of the market in the near term.

Russia: Russia’s government noted on Sunday that sovereign bond payments would depend on sanctions imposed by the US and its allies over the invasion of Ukraine, raising concerns that it might default on its debt. The government said that it would service and pay sovereign debt in full and on time, but that payments could be hampered by the international sanctions. This raised the prospect of a technical default on Russian debt. Note that these comments came after ratings agencies cut Russian debt to junk last week, citing the difficulties the nation would have in repaying its debt.

Hungary: Given the fallout between Russia and Ukraine, risks premiums in the CEE region have continued to edge higher. Hungary’s risk premiums remain higher in the region compared to its peers when looking at the 10yr HGB yield spread over German bunds. The spread has widened by about 64bps so far this year to reach 564bps, the highest level on record. This compares with a 58bps increase to 443bps for Poland and 26bps increase to 329bps for Czechia. The high-risk premium in Hungary suggests that the country’s fiscal dynamics could come under pressure as debt servicing obligations and borrowing costs increase. 

Poland: Given the high market volatility amid the ongoing Russia-Ukraine crises and rising global crude oil prices resulting in elevated inflation pressures, Poland’s interest rate swap curve flattened last week as shorter dated rates tenors rose notably. The 2yr IRS climbed more than 19bp as the market is pricing interest rate hike risk amid the increased inflation pressures globally, while the 10yr remained flat. As a result of the flattening bias, the 10v2 swap spread compressed to reach its lowest level since March 2002. With the outlook of oil still bullish as the crisis is not abating, front-end IRS rates are likely to be increase further in the coming sessions, with the curve to deepen its inversion.

Czech Republic: Turmoil in European markets, heightened uncertainty over the economic outlook, and a scaling back of rate-hike bets meant investors were keen to snap up safe-haven bonds. The eurozone’s benchmark 10yr Bund yield fell 30bps last week in their biggest one-week fall since the euro debt crisis in 2011, slipping back into negative territory at -0.073%. This contrasted with the previous week when the Bund was trading at 0.22%. Meanwhile, the CZK 10yr bond yield has continued to rise, trading at 3.0977%, the highest since February 2012. The premium on the CZK benchmark bond is now at 330bps, the highest on Bloomberg records.