A sense of “risk off” has returned to the the market, with 10Y yields sliding, the dollar rebounding from session lows and the Turkish Lira resuming its plunge, renewing concerns about emerging market contagion, leading to a “red return” across global market monitors, following yesterday’s torrid surge in the S&P500.
The USDTRY surged over 8% on Friday, infecting risk sentiment in a generally subdued and low volume session.
There wasn’t one specific catalyst for the latest sharp selloff, although some cited the latest credit measures to help domestic corporates as potentially increasing pressure on banking system.
In its latest steps to shield the economy and mitigate the impact of “economic attacks on our country”, Albayrak’s finance ministry on Friday said that non-financial companies’ credit worthiness wouldn’t be affected by failure to service debt amid the recent rout. Credit lines to firms would remain open, and pricing and repayment periods would be kept flexible, it said. The finance ministry also said that:
- It would limit breaches due to lira decline in loans won’t be taken into consideration; banks won’t demand loan closings in such instances
- Banks won’t demand additional collateral for corporate loans whose collateral value have declined due to lira depreciation
- Force majeure may be declared on loan repayment delays, dud cheques and protested bills. Thus, companies’ access to credit won’t be impaired
In other words, the government is giving banks a blank slate to continue business as usual even if they are on the verge of collapse, not only intensifying the deterioration of the economy, but breaking down traditional risk signaling pathways.
Another reason behind today’s slide was potential risk-shedding before week long Turkish public holiday and upcoming S&P comments on Turkish rating.
Overnight, President Trump stated that Turkey has taken advantage of US for many years and are now holding US pastor, while he added the US will not pay anything for the release an innocent man but are cutting back on Turkey. Separately, a report in Middle East Eye said that Turkey is ready to release Pastor Brunson but the US is offering nothing in return.
TRY traders are also spooked as we may see the the outcome of the appeal court’s consideration of Pastor Brunson’s release request today: it is expected some time this week after the second criminal court rejected the request on Wednesday. On Thursday, Treasury Secretary Mnuchin also threatened more sanctions overnight over Brunson’s ongoing detention, suggesting further headline risk for US-Turkey tensions. “It still looks like we’re headed to more conflict,” Kathy Jones, chief fixed-income strategist at Charles Schwab Inc. “Neither side seems to be backing down yet.”
Meanwhile, that other closely watched FX pair, the USDCNH briefly pushed lower on reports that the U.S. will pressure for a stronger yuan, however the move was s not sustained given similar reports from WSJ yesterday; and as a result the offshore Yuan was trading around 6.87, just fractionally lower than the Thursday close. Also notable, the offshore yuan interbank rates (Hibors) rose sharply in delayed response to yesterday’s liquidity move via forwards.
European and U.S. equity futures grind lower, in cash equities the bank and auto sectors underperform in typical risk-off manner. S&P index futures were little changed as investors await further developments in the renewed dialog between the U.S. and China. Attention will shift later to leading indicators and University of Michigan Confidence Index, while the only big company to report earnings is Deere & Co. According to Bloomberg, Department-store stocks will be in focus after Nordstrom boosted forecasts and surged after hours, as well as chip stocks after Nvidia and Applied Materials disappointed investors with their outlook.
In Europe, tech shares weighed on the Stoxx Europe 600 Index after disappointing results from U.S. chipmakers including Nvidia and Applied Materials. And while most Asian stocks advanced, Chinese shares slid again as U.S. President Donald Trump prodded Beijing to offer more at the bargaining table in their first major negotiation planned in more than two months. The Shanghai Composite tumbled to a new two year low.
Emerging-market stocks were relatively steady following a seven-session sell-off that brought them to the brink of a bear market, although if the TRY plunge continues contagion may re-emerge: as noted above, the market convulsions were again on show on Friday, as the lira slid to as low as 6.32 per dollar, bringing its losses for the year to more than 40%.
Today’s instability followed news of a possible breakthrough in the U.S.-China trade dispute which brought some calm to markets whipsawed by the brewing financial crisis in Turkey and renewed angst over technology stocks. Traders are catching their breath after a sell-off in commodities and emerging-market stocks, which are on the brink of their worst weekly performance since the February volatility blow-up, signaling the trade war remains the wildcard for many markets.
“I don’t think we’re quite out of the woods yet,” Marcus Miholich, a managing director at State Street Global Advisors Ltd., told Bloomberg TV in Sydney. “Investors have definitely taken note of these tensions and have reallocated into more defensive sectors and defensive names. Given we don’t seem to have the light at the end of the tunnel just yet, that will continue.”
In other geopolitical news, US administration official said President Trump and Russian President Putin agreed in principle that Iran should exit Syria, although the official added that Russia sees this as a difficult task. US Pentagon report stated China has been expanding fleet of long-range bombers during last 3 years and are ‘likely’ training for missions which target the US.
The Bloomberg Dollar Spot Index headed for a third straight week of gains, and rebounded from session lows on Friday as the Turkish Lira slumped. The euro hit a one-week high versus the Swiss franc as risk sentiment keeps improving and filled option-related supply above 1.14 versus the greenback.
The euro extended its advance and gained as much as 0.4% to touch 1.1419 high as stops above 1.14 were triggered, before falling back below that handle. Yen and New Zealand dollars led gains against the greenback, with many short-term accounts citing yuan performance as a driver for the moves; USD/JPY fell as much as 0.4% to 110.49 low with the pair continuing to consolidate between 110-111. The pound erased gains as leveraged supply near highs absorbed buying pressure; the currency headed for its sixth weekly loss.
Treasuries extend gains as the lira weakens, with the UST curve led by 10-year. The yield on 10-year TSYs dropped 1 bp to 2.85%, the lowest in more than four weeks. Italy’s 10-year yield rose less than one basis point to 3.12%.
Elsewhere, oil climbed despite a surprise gain in U.S. crude stockpiles, while zinc fell, heading for its worst weekly performance since 2011. Oil prices are up this Friday but are still set to end the week in the red for the third week in a row. WTI and Brent are both up ~0.25% on the day as energy specific news flow remains light. In the metals scope, Gold is up marginally off the back of USD weakness and testing the USD1180/OZ level to the upside, but is still set for its largest weekly fall in 15 months. Precious metals are slightly in the green with all of silver (+0.2%), platinum (+0.4%)and palladium (+0.1%) up on the day.
Expected data include Conference Board U.S. Leading Index and University of Michigan Consumer Sentiment Index. Deere reports earnings.
Market Snapshot
- S&P 500 futures down 0.1% to 2,841.25
- STOXX Europe 600 up 0.06% to 381.65
- MXAP up 0.5% to 161.95
- MXAPJ up 0.5% to 521.93
- Nikkei up 0.4% to 22,270.38
- Topix up 0.6% to 1,697.53
- Hang Seng Index up 0.4% to 27,213.41
- Shanghai Composite down 1.3% to 2,668.97
- Sensex up 0.8% to 37,952.37
- Australia S&P/ASX 200 up 0.2% to 6,339.23
- Kospi up 0.3% to 2,247.05
- German 10Y yield fell 1.5 bps to 0.305%
- Euro up 0.3% to $1.1412
- Italian 10Y yield fell 5.1 bps to 2.844%
- Spanish 10Y yield fell 0.5 bps to 1.44%
- Brent futures up 0.5% to $71.80/bbl
- Gold spot up 0.3% to $1,177.61
- U.S. Dollar Index down 0.3% to 96.33
Top Headlines from Bloomberg
- President Donald Trump prodded China to offer more at the bargaining table as the two countries prepared for their first major negotiation in more than two months in an effort to head off an all-out trade war
- U.S. Treasury Department will seek to pressure China to lift the value of yuan in coming trade talks, NYT reports, citing unidentified person briefed on the plans
- In government offices and think tanks, universities and state-run newsrooms, there is an urgent debate underway about what many in Beijing see as the hidden motive for Washington’s escalating trade war against President Xi Jinping’s government: A grand strategy, devised and led by Trump, to thwart China’s rise as a global power
- Australian central bank chief Philip Lowe said he’d still like to see the nation’s currency weaken further and sees interest rates remaining at a record low “for a while yet”
- Oil headed for the longest run of weekly declines in three years, dragged down by everything from an emerging-market rout to rising global supplies and lingering concerns over a spat between the world’s biggest economies
- Investors withdrew money from a range of asset classes over the past week analysts at Jefferies write in research note, citing EPFR Global data for week ended Aug. 16.
- NYT: U.S. Treasury will seek to pressure China to lift the value of yuan in coming trade talks, according to people familiar
- Fed’s Powell speech on monetary policy at Jackson Hole confirmed for 10 a.m. New York time on Aug. 24; full agenda to be released at 8 p.m. New York time on Aug. 23.
- Eurozone July CPI unrevised y/y at 2.1%; Core CPI unrevised at 1.1%
- China People’s Daily: China has ‘big room’ for macro-economic control; will take more proactive policies to stabilize trade, including pushing forward signing of free-trade agreements
- Mnuchin says Turkey faces more sanctions if pastor not released
Asian equity markets were mostly higher as the region tracked the performance on Wall St where all majors gained as sentiment was buoyed by trade optimism from the announcement of upcoming US-China trade talks. ASX 200 (+0.1%) and Nikkei 225 (+0.4%) were both higher although the former somewhat lagged after having stalled at fresh highs last seen in over a decade, while gains in Japanese exporters were contained by a stable currency. Hang Seng (+0.4%) and Shanghai Comp. (-1.3%) both initially conformed to the positive risk tone amid the trade-related hopes, continued PBoC liquidity efforts and as Hong Kong-heavyweight Tencent also rebounded from post-earnings losses, although the Shanghai Comp. eventually gave back its gains and then some, as sentiment deteriorated across the mainland. Finally, 10yr JGBs saw mild gains as prices rebounded from the prior day’s weakness and with the BoJ also in the market under its bond buying programme. PBoC injected CNY 90bln via 7-day reverse repos for a net weekly injection of CNY 130bln vs. neutral last week.
Top Asian News
- Turkey-Exposed Cos. May Be Back in Focus After Mnuchin Comments
- U.S. Said to Seek to Pressure China to Lift Yuan in Talks: NYT
- Interest Rates in China Below the U.S. Level Risks Outflows
- Apple Supplier Luxshare Said to Plan Camera Module IPO: Nikkei
European equities have started the day marginally lower (Euro Stoxx 50 -0.3%) as we approach the week’s end. The AEX is currently the underperforming bourse, with losses lead by Vopak (-7.0%) (whom are also at the foot of the Stoxx 600) after missing expectations on all of net profit, EBITDA and revenue. AP Moeller Maersk (+4.7%) also reported earnings, wherein revenues came in above least years results. The co. also confirmed source reports it is looking to spin-off it’s drilling unit and list it on the NASDAQ so as to focus on their transport business. Air France appointed the Ex-COO of Air Canada last night, Ben Smith, as CEO. Despite opening higher Air France shares reversed course amid protests from French unions about the Canadian’s appointment, and are currently down 4.0%.
Top European News
- Tycoon Deripaska Weighs Moving Sanctioned Companies to Russia
- Barclays Scraps Long Stance on Italy Bonds After Latest Selloff
- Draghi’s Richer Toolbox Keeps ECB Calm as Turkey and Italy Rage
- Air France-KLM’s New CEO Faces Immediate Union Threat of Strike
- Atlantia Gains on Report of Talks to Pay Fine on Bridge Collapse
In FX, the dollar index saw some downside deviation from the relatively tight range around 96.500 that has been prevalent since the Try-led EM exodus subsided amidst reports (albeit dated) that the US will urge China to revalue the Yuan during trade negotiations scheduled for next week. The index dipped just under 96.300 amidst broad Usd declines, but still restrained trade overall. TRY/YUAN – The Lira maintained enough recovery momentum to trade a fraction above 5.7500 vs the Dollar, but stopped short of Thursday’s circa 5.7000 high that is very close to a key Fib level and in volatile conditions reversed to hit 6.0000+ levels. Meanwhile, the PBoC halted a run of daily Cny depreciations via the official mid-point fix to leave the offshore Cnh off recent lows and also bolstered by the provision of 7 day liquidity. NZD/AUD – Highlighting the considerably improved risk tone, the Kiwi is making a more concerted effort to form a base at 0.6600 vs its US counterpart, while the Aud has extended above 0.7250 again, though still unable to reach 0.7300 with technical resistance just a head of the big figure and the RBA reiterating no rush or rationale to raise rates anytime soon (Governor Low overnight and message rammed home by Ellis earlier today). EUR/JPY – The next best G10s, as the single currency revisits 1.1400 vs the Greenback where big option expiries run off today (1.9 bn from the big figure to 1.1410) and Usd/Jpy retreats from 111.00 again and also eyes hefty expiry interest, with 2.2 bn at the110.50 strike.
In commodities, oil prices are up this Friday but are still set to end the week in the red for the third week in a row. WTI and Brent are both up ~0.25% on the day as energy specific news flow remains light. In the metals scope, Gold is up marginally off the back of USD weakness and testing the USD1180/OZ level to the upside, but is still set for its largest weekly fall in 15 months. Precious metals are slightly in the green with all of silver (+0.2%), platinum (+0.4%) and palladium (+0.1%) up on the day.
US Event Calendar
- 10am: Leading Index, est. 0.4%, prior 0.5%
- 10am: U. of Mich. Sentiment, est. 98, prior 97.9; Current Conditions, prior 114.4; Expectations, prior 87.3
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