Duncan Donald

Mon, Aug 13

Turkey and Contagion worries – Weekly Markets Update 13/08/18

The main theme to dominate the markets last week was the situation in Turkey. With the Turkish Lira getting heavily sold into the end of the week, following the US and Trump doubling the steel tariffs on Turkey. Having fallen in value by nearly 45% against the US dollar in the last year the Turkish Lira is the worst performing currency in 2018 to date. 

The obvious question is of course …. why?  Under the leadership of President Erdogan Turkish inflation has spiralled out of control. His reluctance to temper the inflation with interest rate rises has unquestionably fuelled this.  Since the global financial crisis, we have seen leading Central Banks strive to increase cash holdings, having seen how important it is to be armed to deal with any eventuality. This is a policy that Erdogan’s Government hasn’t implemented in fact in the same time period, we have seen their overseas borrowing increase particularly against the US Dollar.  On Friday after a week of the Lira trading on the decline, we saw the announcement of a double in tariffs, just moments before President Erdogan was due to address the nation, to which, the markets responded violently. The USD/TRY level touched around 7.0000 in Fridays trading then again on the Asia open with Turkish 10 year bonds yields breaking through 20%.

It is evident the market has little faith in the country’s ability to deal with this situation, with the financial stimulus armour of reserves or interest rate stimulation, either not available, or not agreeable to Erdogan. His suggestion that the Turkish public should repatriate any Dollars or external holdings back into Lira, did more harm than good as he addressed his nation. The only alternative to appease the markets would be a complete overhaul of leadership and Central Banking, however, at this stage this is looking unlikely.

So, naturally all eyes will be on Turkey this week as we look to see their plans. The Finance Minister Berat Albayark forewarned the Market ahead of Mondays open that necessary action was coming, but as yet this has not been delivered, and we remain on historic lows for the Lira.  The main concern for the global economy is of course contagion, could Turkey be the tip of the iceberg. We are already seeing the South African Rand, another “Emerging Market” under heavy pressure sliding 10% on the open as investors look to exit and pessimistic speculators position.

Contagion hit the equity markets on Friday, and this theme has continued today. On Friday, European equities as concern remains particularly in Banking stocks with Spanish bank BBVA , Italy’s UniCredit, Frances BNP and the German banking sector all coming under pressure due to known and perceived holdings in the Turkish Banking sector. This has brought about Euro selling pressure taking us down to lows of 1.1365 the lowest level seen since June 2017 as the US dollar strength continues still.

Naturally when the market delivers losers, there must be winners, as exposures are cut and re invested in less risky assets. As such we have seen the Swiss Franc appreciate as well as Gold, and the Japanese Yen to a slightly lesser extent. In the bond space the US 10 Year is pushing toward the 3% mark again.

However, a wider question must be asked on the US.  The short-term gains to the US economy from the global trade war are evident, but what will the long-term implications be. The US are proving themselves to be a wholly unreliable and volatile trading partner, bullying relationships for their own gain. This potentially could impact the use of the Dollar as a currency reserve, with countries like Russia, Iran and potentially Turkey opting to hold euros as opposed to Dollars.

Last week we saw more strong UK data from the UK, as GDP confirmed that the UK had shrugged off the dragging seasonality effects of the first Quarter of the year, coupled with the rate hike the previous week, you would have expected to see positivity reflected ion the economy and currency. However, we have seen the pound hit year long lows, trading at 1.2724 as Dollar strength and Brexit concern still weigh on the markets. We have more “crucial” talks between the UK and the EU this week, but, lack of action or decisiveness in previous “crucial” meetings will of course have optimism at the lower end of the scale. Therefore, keep an eye on developments on Thursday or Friday this week to see if we can start to see some compromise or solid negotiation prevail.  Data wise we see Average Earnings on Tuesday, Inflation Data and PPI on Wednesday and Retail Sales on Thursday. 

The Chinese currency slid for the ninth-straight week as a global currency sell-off triggered by Turkey’s financial troubles compounded worries about China’s trade fight with the U.S. The yuan’s drop against the dollar has accelerated since mid-June as trade tensions between the U.S. and China have heated up. Earlier in the week, Beijing said that it would levy 25% tariffs on an additional $16 billion worth of U.S. imports starting August 23—the same day that the U.S. plans to start collecting 25% extra in tariffs on $16 billion of Chinese goods.

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