Morning Note /

Markets tentatively optimistic ahead of high-level Russia-Ukraine talks

  • Russia CPI data point to severe inflationary episode

  • Optimism over high-level Russia-Ukraine talks drives strong EM currency rebound

  • IRS rates continue to rise as investors position for global inflation

Danny Greeff
Danny Greeff

Financial Market Analyst

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

Markets tentatively optimistic ahead of high-level Russia-Ukraine talks

Talking Points: Russia CPI data point to severe inflationary episode   

South Africa: The local data card remains busy today, with Q4 current account, January mining output, and January manufacturing output stats all scheduled for release. The current account data are expected to reflect a slight deterioration, owing to a steady decline in the trade surplus from last year's peak. This dynamic may reverse through the current quarter, however, as the Russia-Ukraine war has proven favourable for SA's terms of trade and renewed its shine as an EM investment destination. As for the mining and manufacturing output numbers, year-on-year improvements are expected due to statistical base effects and improving demand, but the outlook remains mired by loadshedding and supply-chain constraints that continuously weigh on delivery times and the availability of factors of production.  

Turkey: The Turkish data calendar heats up today with the unemployment rate, and portfolio flows releases on tap. The jobless rate fell marginally by 0.1ppt to 11.2% in December, lower than the 12.6% recorded during the corresponding period in 2020. The tightening labour market is likely to support the domestic consumptive dynamics, which bodes favourably for economic growth. However, Turkey is facing an economic crisis at present, with inflation nearing 50%, and the value of the Turkish lira has depreciated notably, leading to economic hardship for people who live off wages and benefits. As a result, this could weigh on the labour market dynamics going forward.

Russia: There is optimism permeating global financial markets that talks scheduled for today between Russian Foreign Minister Sergei Lavrov and his Ukrainian counterpart Dmytro Kuleba might yield some progress towards a de-escalation of the war. This is the highest-level meeting and the first between the two since Russia invaded Ukraine two weeks ago. Although Ukraine has made it clear that the only solution was for Russia to capitulate, financial markets cheered the news that Ukraine was prepared to enter talks in a bid to restore peace.

On the data front, CPI stats released yesterday suggested Russia is heading for one of its biggest inflations spikes this century after Western sanctions over the invasion of Ukraine triggered a collapse of the RUB and disrupted trade flows. CPI numbers for the week of 4 March, which marked the first week of the war, showed a 2.22% w/w inflation rate. This was the sharpest week-on-week inflation rate since records began, and more than double the previous record. This was one of the starkest reflections yet of the damage wrought on Russia's economy from the war, and likely only marks the beginning.

Hungary: The local data card is thin today, with only the NBH rate decision on tap. Market expectations are for the central bank to aggressively hike the one-week deposit rate for the third consecutive week. The sustained external inflationary pressures coupled with the increased short-term risks in financial and commodity markets due to the ongoing geopolitical crisis will corroborate the case for the central bank to tighten monetary policy to try stabilise inflation and curb expectations.

Poland: During a media conference held yesterday, NBP Governor Adam Glapinski noted that the ongoing geopolitical tension between Russia and Ukraine war would add some two percentage points to Poland's inflation, which is already at a two-decade high of 9.2%. Against this backdrop, the central bank pledged to continue on a tightening path in the coming months to help offset the fallout from the conflict. Glapinksi favoured strong and fast tightening when he said that "In a situation of such great level of risk aversion, we need to act fast and decisively because we must work towards curbing inflation and normalising the zloty exchange rate." Some of the key takeaways from the news conference included that the central bank sees inflation as too high and need to bring it down to an acceptable level that should be achieved in 2024. The Polish economy is also expected to slow down from very fast growth to fast growth (such as 3.5%-4%) but the bank sees no risk of a recession. The zloty is now currently strongly undervalued according to the NBP, which also sees the influx of refugees as a positive for the Polish economy.

Czech Republic: Inflation data is scheduled for release today. Inflation has been a buzzword for financial markets this year as investors look for signs that major central banks will accelerate the pace of their monetary tightening. February's headline inflation is expected to print a bumper figure of 10.4% y/y from 9.9% y/y in January. The peak, however, is now anticipated to be above 11% as further inflationary factors arise from the war, as a result of a sharp rise in commodity prices. February's reading is likely to point to widespread price increases in the economy, with almost all components of the consumer basket, especially fuel, energy, food and housing costs, rising. The persistence of high inflation remains concerning, and the central bank may still opt to tighten its policy later this month, but this comes against a substantial hit to GDP growth across Europe. 

Forex: Optimism over high-level Russia-Ukraine talks drives strong EM currency rebound   

South Africa: Following yesterday's strong daily advance, the ZAR has consolidated with a bearish tilt this morning as traders book profits and await feedback from the meeting between Russia and Ukraine's foreign ministers and the performance of global markets. As was so often the case before the war started two weeks ago, the USD-ZAR was again unable to sustain a break below the 15.0000 mark overnight. The market considers sub-15.0000 trade as a good entry level for the pair, especially given the high degree of uncertainty in Ukraine and the recent escalation of loadshedding in SA. Heading into the weekend, the USD-ZAR will likely remain headline-driven, with a high degree of volatility still expected as investors digest new developments in Eastern Europe, the ECB's policy update, and US CPI stats.

Turkey: The USD-TRY continued its ascent on Wednesday, the broad-based dollar weakness notwithstanding. The pair firmed by about 1.13% to reach a new record high of 14.6461 and extend its winning streak to seven consecutive sessions. The ongoing fallout between Russia and Ukraine, weighing on investor sentiment, and weak underlying macroeconomic fundamentals overshadowed the depreciation in the greenback. It is noteworthy that the TRY has lost more than 7.00% since the start of Russia’s attacks on Ukraine, taking its YTD losses just north of 10%, making it the second-worst performer in the EM FX space after the Ruble.

Russia: Catching up after two days of domestic market closure, the RUB tumbled to a new record low of 120.00/$ yesterday. This decline came despite measures by Russian authorities aimed at shoring up the country's battered economcy and safeguarding hard currency availability amid fresh economic sanctions over the Ukraine invasion. Should the invasion become even more stretched out, the RUB will likely turn increasingly vulnurable and prone to further weakness. Accordingly, today's talks between Russia and Ukraine's foreign ministers hold plenty of market-moving potential.

Hungary: CEE peers traded on the front foot against the EUR, as sentiment improved after comments from the Ukraine official that the country was ready for a diplomatic solution to Russia's aggression. Against this backdrop, the EUR-HUF extended its bounce away from the record highs for the second consecutive day after retreating by about 1.92%.  Additional support for the HUF stemmed from higher than expected CPI data which dialled up wagers that the NBH will aggressively hike interest rates. The cross slipped to reach the 378,77 mark, its worst performance since March 1. The pullback has continued in the early morning session, with the cross down 0.57% at the time of writing. Whether or not the retreat can be sustained remains to be seen, given the lingering geopolitical risks.

Poland: The PLN bulls remained in control for the second successive day yesterday on the back of a bigger than expected rate hike by the NBP and the more hawkish pledge made by Governor Adam Glapinski during a media presser. The local unit rallied by about 2.43%, making it the best performer amongst CEE peers and extending its gains to 4.20% in just two days. The EUR-PLN cross ended yesterday at 4.7763/EUR, its lowest level since March 2. Given that external conditions remain highly volatile, it may be difficult for the zloty to sustain these recent gains, unless we start to see some positive developments on the war front. Note investors will likely also exercise some caution ahead of the ECB meeting slated for later today.     

Czech Republic: The CZK firmed notably yesterday, briefly piercing through the 200DMA resistance at 25.250/EUR as improved financial market optimism on a drop in oil prices and the prospects of talks between Russia and Ukraine dampened the demand for safe-haven assets, resulting in the CZK closing at 25.242/EUR. While the duration of the relief rally is uncertain, the CNB will remain a backstop to any FX volatility and continue to support the CZK for as long as necessary, according to Governor Rusnok, but expects the depreciation pressures to fade soon. In pre-market trade, there has been no rush to safe-haven assets and should the CZK break through the 200DMA, it will eye the 100DMA at 25.00/EUR.

Fixed Income: IRS rates continue to rise as investors position for global inflation   

South Africa: SAGBs have pulled back from their worst levels on news of progress in Ukraine-Russia talks. While a peace deal is still far from sealed in stone, SA's high yields and relatively stable currency suggest that a relative outperformance could be expected. The long end of the curve has rerated higher with the R2048 providing yields north of 10.9%. Meanwhile in the FRA market, rising oil prices and the risk of an inflation spike in SA continue to be the major drivers of FRA paying interest. The 3x6 is pricing in roughly 86bp worth of rate hikes, while the 9x12 is pricing in over 205bp. A potential receiving opportunity when considering that the SARB remains mindful of growth risks.

Turkey: Turkish bonds were able to capitalise on yesterday's recovery in risk appetite, with yields falling across most of the curve through the session. Moves were especially pronounced at the long end of the curve, leading to a bull flattening bias on the day. However, pulling back the lens slightly shows Turkish bonds have sold off sharply over the past two weeks, and are unlikely to stage a full recovery even if there is progress towards a ceasefire in Ukraine. Many of the ramifications of the war will have longer-term inflationary effects, with inflation a big problem in Turkey as is.

Russia: Russian interest rates swaps have surged in recent weeks, and are set to remain extremely elevated if yesterday's CPI numbers are anything to go by. There are growing signs that inflation is surging in the country, which will force the CBR to hike interest rates aggressively in the months ahead to get a grip on price pressures. At the same time, the risk of technical default on OFZs also means higher rates are warranted to attract foreign capital going forward once the war ends.

Hungary: A switch auction held on Wednesday saw the AKK sell HUF12.5bn of bonds maturing in 2030 and 2033, exchanging for the ones expiring in 2023 and 2024, after primary dealers' bid came in at HUF46.7bn. Interest for a switch to the  2033/A bonds for 2024/B bonds was most notable, with total bids arriving at HUF32.9bn and the agency selling HUF7.5bn, HUF2.5bn above the initial plan. The AKK sold HUF5.0bn of 2030/A bonds, exchanging for 2023/A bonds as payments. Primary dealers had bid to switch HUF13.8bn.

Poland: Polish bonds remained under pressure on Wednesday, with yields drifting across the curve to reach multi-year highs buoyed by the aggressive rate hike by the NBP and a more hawkish tone struck by central bank governor Adam Glapinski during the media conference held yesterday.  Also, sentiment in the region remains tentative as geopolitical risks remain elevated, meaning that investors may continue to rotate out of regional bonds.

Czech Republic: CZK swap rates continued to rise across the IRS curve yesterday as investors assessed the likelihood for growing inflation and stagflation. So far this week, front-end local swap rates have risen by 40bps to 60bps, while belly and long-end rates have risen by 20bps. Investors will have the latest inflation data to digest, which is likely to see swap rates paid higher, given that the estimated peak in consumer prices is still some way off. As far as market pricing goes, the 1x4 FRA has baked in a 50bps interest rate hike ahead of this month's policy meeting, which is in line with comments hinted at by CNB Governor Jiri Rusnok.