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The sheer pandemonium in Turkey continues.

It’s not just Turkey’s currency and sovereign bonds that have resumed their plunge today: Turkish stocks are all sharply lower, with the Borsa Istanbul down over 4% after being sharply lower earlier. However, that’s in local currency terms: in dollar terms, Turkish stocks are now at their lowest level since March 2009.

So far in 2018, the local stock market has lost a fifth of its value in lira terms, but a whopping 55% in USD terms, while banks – which Goldman recently warned would see their excess capital wiped out if the lira hits 7.1 – have fared especially bad with the BIST 100 bank sector down 7.4% on Monday, 40.7% in local currency terms for the year to date, and down a whopping 70% YTD.

“Within the current backdrop, we view banks as being vulnerable to Turkish Lira depreciation given that it impacts,” Goldman warned last week.

However, another even more troubling move has been seen in Turkey’s credit default swaps which are “shooting through the roof” because the economy is heavily indebted and there is “widespread fear that a good part of these claims will have to be cancelled,” wrote Commerzbank analyst Ulrich Leuchtmann.

As shown in the chart below, five-year Turkish CDS soared over 125bps to more than 550 today, the highest since 2008, and surpassing the similar maturity CDS for Greece.

Leuchtmann continued his dire outlook on Turkey, and warned that USDTRY would “strive towards infinity” on the currency market, noting that “exchange rates can then no longer be reasonably projected.”

The commerzbank punchline:

“if confidence disappears as radically as in Turkey at present, money loses its value totally. This effect is domestically called hyperinflation.”

Meanwhile, since a state receives most of its revenue in its domestic currency, it must either adjust its tax rates as quickly as hyperinflation gallops – which is hardly practicable or the government cannot service its FX-denominated debt any more.

His advice: impose capital controls immediately, as they would at least temporarily curb capital flight “would perhaps be the best solution from today’s point of view.” However, the bigger problem is that for Turkey, which desperately needs capital inflows…

… capital controls would also be a death sentence, if only a somewhat delayed one, as the economy would implode and it would become impossible to roll over or refi any USD-denominated debt, resulting in a wave of corporate defaults, once again sending the lira into the Venezuelan stratosphere.

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For the first time since March 2017, spot gold is trading back below $1,200 as a surge in the dollar seems to be overwhelming any potential safe-haven flows into the barbarous relic.

 

Bloomberg believes this is a positive sign for global contagion fears as unlike in past crises, for instance Greece – gold and the dollar are not rising together.

If the waves from Turkey’s crisis really were expected to knock over dominoes in South Africa and Mexico, as well as banks in the euro zone, the yellow metal could easily have risen alongside the dollar, as it did when Greece nearly blew up back in 2010.

Spot gold is now at its lowest level since Jan 2017…

As the dollar breaks out…

Some desk chatter is that spot gold is weakening due to Turkey dumping the reserve asset to support its currency, but there is no news to confirm that.

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Bayer AG shares are down over 12% this morning – the biggest drop ever – to the lowest levels since October 2013, amid investor anxiety over the potential future legal costs associated with newly-acquired Monsanto’s RoundUp weedkiller.

As we detailed Friday,  a San Francisco Jury awarded $289 million in damages to a former school groundskeeper, Dewayne Johnson, who said Monsanto’s Roundup weedkiller gave him terminal cancer.

The trial was an important test of the evidence against Monsanto and will serve as a template for litigating thousands of other claims over the herbicide.

As Bloomberg reports, the verdict surprised Bayer investors and may stir up memories of the scandal over cholesterol-lowering pill Lipobay, said Markus Mayer, an analyst with Baader Bank AG. Bayer paid more than $1.1 billion to settle suits over the heart drug.

“Investors might worry that this will become a ‘Lipobay 2.0,’” Mayer said.

The company, whose market value fell by more than 10 billion euros ($11.4 billion) Monday, says Roundup is safe.

“They’re going to appeal, and we’re going to have to see what happens then,” said Ulrich Huwald, an analyst with Warburg Research in Hamburg. Even if Bayer doesn’t face similar verdicts in other cases, the company may need to pay out settlements. “As the northern Germans say, ‘In court and on the high seas, you’re in God’s hands.’”

Bayer closed a deal to buy Monsanto for $66 billion in June. If the litigation generates large verdicts, it could have a material impact on Bayer’s bottom line, said Chris Perrella, an analyst for Bloomberg Intelligence.

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The rollercoaster continues.

Moments after the Turkish Lira tumbled following the latest defiant speech by Turkish president Erdogan, in which he blamed “online terrorists”, an unconfirmed report on Twitter said that the imprisoned Pastor Brunson would be released from house arrest on August 15 .

US PASTOR BRUNSON TO BE RELEASED FROM HOUSE ARREST BY AUG 15 – US EMBASSY IN ANKARA

— MONEY CHINA (@money_china) August 13, 2018

The so far unconfirmed report turn sent the USDTRY tumbling…

… and pushed US equities sharply higher.

So far the news has not been confirmed by either the US or Turkey, and a denial will likely promptly reverse the entire move, although for now there is a sense that at least a modest de-escalation in the US-Turkey diplomatic relations could be on deck.

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While the past week was somewhat quiet data wise, news flow should step up next week with key releases of note in the US being the July retail sales report and industrial production among others, although the main focus will remain the ongoing collapse in Turkey’s currency and whether there will be contagion to other emerging (and developed) markets.

Then there is the ongoing trade war with China: with less than two weeks remaining before threatened tariffs on $16bn of each other’s exports come into force, and the threat in the US to add another $200bn of imports to the list, the Sino-US “trade-war” narrative holds the greatest potential to drive markets according to SocGen. There is also the recent collapse in the Russian ruble, as the Trump admin dangles new sanctions. However, the crisis in Turkey is the most immediate test of financial market confidence. Data highlights include China’s monthly activity indicators which should reflect stimulative policy action, or else. Also on deck is the second revision to Q2 GDP in the Euro area and final July CPI reports are also due in Europe.

Away from that, Brexit negotiations will resume in Brussels while the earnings season in the US and Europe will move into their final stages.

With regards to the economic data that’s due out next week, in the US we’ll get a few important releases which should help to further shape Q3 GDP expectations. The highlights come on Wednesday when we get the July retail sales report
(consensus is for a +0.1% mom headline reading and +0.5% mom control group reading).  After a strong Q2, and expectations that tax cuts and a strong labor market will fuel consumption in 2H, SocGen predicts that the July data will give us a clue as to whether the Q2 strength carried over in early Q3. Elsewhere, industrial production could have increased by 0.4%, while housing starts likely rebounded noticeably.

Outside of that we’ll also see the July import price index reading on Tuesday, preliminary Q2 readings for unit labor costs and nonfarm productivity on Wednesday.  Look for a rise in Q2 productivity growth, but the bounce will be short-lived and not indicative of an underlying acceleration.

August Philly Fed PMI and July housing starts and building permits data on Thursday, and the preliminary August University of Michigan consumer sentiment survey on Friday.

In Europe, Deutsche Bank writes that there will be plenty of eyes on the second revision to Q2 GDP for the Euro area on Tuesday. As a reminder the preliminary print came in at a weaker than expected +0.3% qoq and the expectation is that it will stay steady at +0.3% qoq. On the same day we’ll also see the preliminary Q2 GDP print for Germany (+0.4% qoq expected) while other data worth highlighting next week in Europe includes the final July CPI revisions scattered throughout, July employment data in the UK on Tuesday, August ZEW survey in Germany on Tuesday, July inflation in the UK on Wednesday, and June trade balance for the Euro area on Thursday.

In China we’ll get the latest July activity data on Tuesday. The market expectation is for retail sales to nudge a tenth higher to +9.1% yoy while industrial production is also expected to rise three-tenths to +6.3%. Fixed asset investment is expected to hold at +6.0% YTD yoy.  In Japan the notable releases include the final June industrial production print on Tuesday and July trade data on  Thursday.

Away from data, Brexit talks will restart between the EU and the UK on Thursday. Given the recent news around Brexit and probability of corporates preparing for a hard Brexit, it will be worth looking out for any fresh headlines there.  Moreover the EU’s chief Brexit negotiator Michel Barnier might hold a news conference on Friday.

Elsewhere earnings season in the US moves into its final stages with just 17 S&P 500 companies due to report but it’s worth highlighting that we will get reports from some of the retailers including Home Depot on Tuesday, Macy’s on Wednesday and Walmart, Gap and Nordstrom on Thursday.

Key events broken down by day, courtesy of Deutsche Bank

• Monday: It’s a very quiet start to the week on Monday with the only data of note being the final July CPI revisions for Italy.
• Tuesday: It looks set to be a much busier day for releases on Tuesday. Overnight the focus will be on China with July retail sales, industrial production and fixed asset investment data due along with June industrial production and capacity utilization data for Japan. In Europe, we get Q2 employment data in France, revisions to Q2 GDP for Germany and the Euro area, the final July CPI revisions for Germany, France and Spain, June employment data for the UK, June industrial production for the Euro area and the August ZEW expectations survey for Germany. In the US, we get the July NFIB small business optimism index, import price index and export price index while the Q2 household debt and credit report by the New York Fed will also be released. Home depot will also be releasing its earnings.
• Wednesday: It should be another busy day for releases on Wednesday. Overnight, we get July new home prices data for China. In Europe, we get July CPI, RPI and PPI for the UK. In the US, we get July retail sales, industrial production, manufacturing production and capacity utilization data along with August empire manufacturing, and preliminary Q2 nonfarm productivity and unit labor costs, June business inventories and August NAHB housing market index. Macy’s will be reporting earnings.
• Thursday: Overnight on Thursday we’ll get the July trade balance data for Japan, while in Europe we get July retail sales for the UK and June trade balance for the Euro area. In the US, we get the August Philadelphia Fed PMI along with July housing starts and building permits data. Walmart, Gap and Nordstrom will also be reporting earnings.
• Friday: There is nothing of note overnight in Asia on Friday. In Europe, we get June current account data and the final July CPI prints for the Euro area. In the US, we end the week with the July leading index and the preliminary August University of Michigan survey.

Finally, here is Goldman with a focus just on the US:

The key economic releases for the coming week are the retail sales and industrial production reports on Wednesday. There are no scheduled speaking engagements by Fed officials this week.

Monday, August 13

• There are no major economic data releases scheduled.

Tuesday, August 14

• 06:00 AM NFIB small business optimism, July (consensus 106.7, last 107.2)
• 08:30 AM Import price index, July (consensus 0.1%, last -0.4%)
• 11:00 AM New York Fed to Release Q2 2018 Household Debt and Credit Report: The Federal Reserve Bank of New York will release its Q2 2018 Household Debt and Credit Report, offering an updated snapshot of household trends in borrowing and indebtedness, including data about mortgages, student loans, credit cards, and auto loans.

Wednesday, August 15

• 08:30 AM Empire State manufacturing index, August (consensus +20.0, last +22.6)
• 08:30 AM Nonfarm productivity (qoq saar), Q2 preliminary (GS +2.4%, consensus +2.4%, last +0.4%); Unit labor costs, Q2 preliminary (GS -0.1%, consensus +0.2%, last +2.9%): We estimate non-farm productivity rose 2.4%, above the +0.75% trend achieved on average during this expansion. This reflects strong GDP growth in Q2 along with moderate growth in average hours worked. We expect Q2 unit labor costs–compensation per hour divided by output per hour–to decline 0.1% due to strong productivity growth, even as data revisions released during the Q2 GDP report have shown faster growth of employee compensation than previously reported.
• 08:30 AM Retail sales, July (GS +0.1%, consensus +0.1%, last +0.5%); Retail sales ex-auto, July (GS +0.4%, consensus +0.3%, last +0.4%); Retail sales ex-auto & gas, July (GS +0.4%, consensus +0.4%, last +0.3%); Core retail sales, July (GS +0.5%, consensus +0.4%, last +0.0%): We estimate core retail sales (ex-autos, gasoline, and building materials) rose at a strong pace in July (+0.5% mom sa), reflecting a boost from record sales on Amazon Prime Day. Based on a pullback in auto sales and a rise in gas prices, we estimate 0.1% and 0.4% respective increases in the headline and ex-auto measures. Recent upward revisions to the personal saving rate have boosted our outlook for consumer spending growth over the next couple of years.
• 09:15 AM Industrial production, July (GS +0.4%, consensus +0.3%, last +0.6%); Manufacturing production, July (GS +0.4%, consensus +0.3%, last +0.8%); Capacity utilization, July (GS +78.2%, consensus +78.2%, last +78.0%): We estimate industrial production rose 0.4% in July, largely driven by further increases in both auto and non-auto manufacturing. We expect capacity utilization to edge up by two tenths to 78.2%.
• 10:00 AM Business inventories, June (consensus +0.1%, last +0.4%)
• 10:00 AM NAHB housing market index, August (consensus 67, last 68)

Thursday, August 16

• 08:30 AM Initial jobless claims, week ended August 11 (GS 215k, consensus 215k, last 213k); Continuing jobless claims, week ended August 4 (consensus 1,741k, last 1,755k): We estimate initial jobless claims rose by 2k to 215k in the week ended August 11, following a 6k decline in the previous week. The trend in initial jobless claims appears to still be declining steadily, mirroring the trend in the unemployment rate.
• 08:30 AM Philadelphia Fed manufacturing index, August (GS +21.5, consensus +22.0, last +25.7); We estimate the Philadelphia Fed manufacturing index declined 4.2pt to 21.5 in August, retracing part of the 5.6pt increase to 25.7 in July. Other indicators of manufacturing activity such as the ISM have been somewhat softer in recent weeks, and we expect this to be reflected in the Philadelphia Fed survey even as the overall growth of manufacturing activity remains solid.
• 08:30 AM Housing starts, July (GS +7.0%, consensus +7.4%, last -12.3%); Building permits, July (consensus +1.4%, last -2.2%); We estimate housing starts rose 7.0% in July, retracing some of the 12.3% June decline. We expect a rebound in both the volatile multifamily category—which declined 19.9% last month—and in the single family category—where starts now look low relative to building permits. While housing starts appear still somewhat low relative to demographic trends, we expect higher interest rates and tax reform to weigh on homebuilding in the next few quarters.

Friday, August 17

• 10:00 AM University of Michigan consumer sentiment, August preliminary (GS 98.5, consensus 98.0, last 97.9); We estimate the University of Michigan consumer sentiment index edged up 0.6pt in the preliminary estimate for August, reflecting strength in recent high-frequency consumer surveys as well as positive stock market returns in the past month. However, tariff-related concerns may weigh on sentiment. The report’s measure of 5- to 10-year inflation expectations stood at 2.4% in July.

Source: DB, BofA, SocGen, Goldman

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With interventions by both the Turkish banking regulators and the country’s central bank failing to halt the collapse in the lira, President Erdogan decided to give it another try, and after several weekend speeches that only exacerbated diplomatic relations with the US while raising concerns about capital controls after the president rejected hiking rates and an IMF bailout, in a televised speech the Turkish president continued to portray Turkey’s current struggle as an “economic siege”, referring to “different forms of these attacks”, and warning that “the economy and other areas” remains potential targets.

“The lira’s recent weakness is part of the economic war being waged against Turkey and has no economic basis”, President Erdogan said adding that his son-in-law, and Turkey’s Treasury and Finance Minister, will “continue to take necessary steps” against “economic siege”

Erdogan promised that the lira will “settle” at a reasonable level soon although it was not clear what level he had in mind. He also vowed that Turkey will never abandon rules of free market economy which is rather bizarre for an “executive president” to say.

Erdogan had a few choice words for the US, commenting on the rapidly-degraded status of the relationship between the two countries: “The US is attempting to stab Turkey in the back… US trade actions are against WTO principals.”

Meanwhile, picking up on the point we noted before, he said that the Turkish judiciary is targeting online “economic terror personalities”, as Turkey prepares to throw in jail anyone it deems is responsible for the ongoing economic collapse… anyone except the president that is. “Those spreading speculation on banks or FX will pay” the president warned.

Finally, he said that today’s developments “bear no similarity to the crises of 1994, 2001 or 2007” which may be the closest admission that today’s development do, in fact, bear a striking similarity to precisely those crises.

Following Erdogan’s speech, the lira promptly resumed its plunged, with the USDTRY spiking back over 7.00 and once again approaching the all time highs set in Sunday’s early session when the currency crashed as low as 7.2362.

 

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Global stocks and US equity futures were a sea of red on Monday morning as the Turkish economic crisis accelerated, and the Lira plunge continued even as measures by both the Turkish banking regulator and the central bank failed to stem the collapse in the TRY.

The lira plunged together with the country’s equity index after President Recep Tayyip Erdogan maintained his defiance toward the U.S. and refused to change financial track in speeches on Sunday.

Erdogan stated the economy is not in a crisis and that weakness in TRY is a currency plot, while he added that “Turkey will win this economic war” and are undergoing preparations to use national currencies for trade with nations such as China and Russia. There were also comments from Turkish Finance Minister Albayrak that the government has an action plan regarding the currency and will take necessary measures on Monday to ease market concerns, while he stated they will not convert nor seize FX deposits and that the currency is being directly targeted by the US President. In related news, Turkish Presidency Communication Chief Altun stated Erdogan’s comments were a warning against FX flight, while the banking regulator also announced to limit swap transactions in which banks’ total swap transactions has been capped at 50% of banks’ equity.

As Bloomberg notes, the lira’s plunge and subsequent sell-off in Turkey is giving investors a flashback to past crises in emerging markets, especially the Asian currency crisis of 1997, and was rattling nerves worldwide and leaving traders speculating on how bad contagion can get.

Commenting on the Turkish contagion, Kerry Craig, global market strategist at JPMorgan Asset Management, said that the rout in the lira “may fuel volatility in emerging-market assets and dampen investor sentiment in the near term, as markets are already skittish. But the drivers of the lira’s decline are very specific to Turkey – therefore it should not derail the positive fundamentals in other emerging markets over a longer-term.”

So far traders disagree, and Emerging Markets were on the verge of a full blown crisis amid fears that potential capital controls by Turkey could prompt accelerated capital outflows from other risky nations…

… and the JPM Emerging Market FX index continued its plunge on Monday.

That said, Emerging Asian currencies pared some losses as central banks stepped in to calm markets. Indonesia and India intervened in the market, while Philippines said it had enough buffers to defend the peso.

“While Asia is still largely insulated from the Turkey turmoil in some ways, what is apparent is that the deficit currencies such as the peso, rupee and the rupiah have generally come under pressure, and are more vulnerable in an environment where risk- aversion picks up and capital flows start taking a hit,” said Mitul Kotecha, senior EM strategist at TD Securities in Singapore

The pressure across EMs spread quickly and the South African rand hit the lowest since June 2016, flash crashing in Asian trading with some noting carry-related selling from Japan, although USDZAR eventually unwound nearly all the move higher.

European equity markets open lower, with sentiment in the region soured by contagion concerns as the Turkish Lira extending last week’s slump. As such, Turkey-exposed banks plumb the depths again with BNP Paribas (-1.0%), BBVA (-3.7%) and Unicredit (-3.2%) all near the foot of their respective bourses, even as the early selloff failed to pick up speed and saw little follow through.

Elsewhere, Germany’s DAX 30 was dragged lower by its third largest constituent, Bayer (-11.2%), whose shares plunged by the most in almost seven years on concern about the potential costs of a legal battle over Roundup weed killer after recently acquired Monsanto was ordered to pay $289MM in fines as a court ruled the company’s weedkiller caused cancer.

Meanwhile, Italian bonds led losses among European sovereign debt markets as the Turkish currency turmoil fueled fears of a contagion effect across riskier assets.  Yields on two-year securities climbed to the highest levels in more than a week.

The Italian 10-year spread over German bunds hit the highest since May even as Deputy Prime Minister Luigi Di Maio was reported as saying in an interview Monday that his country won’t be subject to an attack by speculators.”“It’s just a flight to safety move, with peripherals and in particular short-term BTPs hit relatively hard,” said Martin van Vliet, senior interest-rate strategist at ING Groep NV. “Di Maio’s comment on speculative attacks is also not taken positively, as this sort of echoes the economic warfare rhetoric from the Turkey leadership.”

As EM currencies tumbled, the yen advanced for second day, approaching the 110 level, as investors shunned risk and turned to safe assets on concern about a spillover from the financial turmoil in Turkey. Japanese government bonds gained along with U.S. sovereign debt.

Asian equity markets began the week lower across the board with sentiment similarly spooked on Turkey contagion concerns. The ASX 200 (-0.4%) was dragged down by mining names, while Nikkei 225 (-2.0%) underperformed on safe-haven flows into JPY and with Mitsui Mining & Smelting down 15% post-earnings. Elsewhere, Shanghai Comp. (-0.3%) and Hang Seng (-1.5%) were also heavily weighed alongside the broad EM-triggered mayhem and continued liquidity inaction by the PBoC. The offshore Yuan was trading near session lows for much of the session.

Across the Pacific, futures on the Dow, S&P 500 and Nasdaq were all all lower spooked by big declines across Asian and European markets. In addition to the strong yen, traders rushed into that other safe haven, the US Dollar, which traded at the strongest in a year as the euro dipped below 1.14.

As the dollar surged, gold tested lows near $1,200 an ounce while 10Y TSY yields were slightly lower.

In geopolitical news, North Korea reportedly rejected several denuclearization proposals made by the US, while South Korea and North Korea are said to hold a summit in September. Russian Finance Minister Siluanov stated that Russia will further reduce holdings of US securities in response to sanctions, but is not planning to shut down US firms. Additionally, Russian Finance Minister said Russia is to halt FX purchases for reserve, as speculated. Meanwhile, Russia’s Kremlin said President Putin has not yet given any orders on drawing up retaliatory sanctions against the US as the scope of planned US measures is unclear.

Elsewhere, commodities dropped, with West Texas crude trading below $68 a barrel and base metals retreating. WTI and Brent were in close proximity their 50 DMA to the downside at USD 67.14/bbl and USD 72.43/bbl respectively. Spot gold fell to the lowest since March 15th 2017, weighed by the greenback as the yellow metal detaches itself from safe-haven properties. London copper is subdued on USD action and the risk-off sentiment. India’s Oil Corporation says Iran is giving insurance cover for oil shipments, having enough term oil shipments to cushion any Iranian shortfall.

There are no economic releases scheduled today; scheduled earnings include Sysco and Stars Group.

Market Snapshot

• S&P 500 futures down 0.2% to 2,829.75
• STOXX Europe 600 down 0.4% to 384.49
• MXAP down 1.6% to 162.80
• MXAPJ down 1.6% to 528.58
• Nikkei down 2% to 21,857.43
• Topix down 2.1% to 1,683.50
• Hang Seng Index down 1.5% to 27,936.57
• Shanghai Composite down 0.3% to 2,785.87
• Sensex down 0.4% to 37,712.05
• Australia S&P/ASX 200 down 0.4% to 6,252.17
• Kospi down 1.5% to 2,248.45
• German 10Y yield unchanged at 0.318%
• Euro down 0.3% to $1.1380
• Italian 10Y yield rose 9.4 bps to 2.722%
• Spanish 10Y yield rose 2.9 bps to 1.436%
• Brent Futures up 0.2% to $72.93/bbl
• Gold spot down 0.6% to $1,203.77
• U.S. Dollar Index up 0.1% to 96.46

Top Overnight News from Bloomberg

• South Africa’s rand plunged the most in almost a decade and Mexico’s peso slumped as financial turmoil in Turkey sapped demand for emerging-market assets
• Turkey’s President Recep Tayyip Erdogan maintained his defiance toward the U.S. and financial-market orthodoxy in speeches on Sunday even after the nation’s currency slumped at the end of last week to record lows
• Turkey signaled a clampdown on news and social media, with officials including the public prosecutor warning that criticism may be viewed as “economic attacks” on the country
• China’s commercial banks sharply cut their holdings of corporate bonds last month in response to a heavy supply of local government paper, even as recent easing measures announced by the central bank encourage lenders to buy more company notes
• South Africa is planning a 59 billion- rand ($4.2 billion) bailout for state-owned companies including the post office, arms manufacturer Denel SOC Ltd. and South African Airways, the Johannesburg-based Sunday Times reported, citing unidentified government officials
• U.K. Prime Minister Theresa May is drawing up a plan to keep key European Union rules for longer after Brexit in order to break the deadlock in negotiations, a move that risks angering euroskeptics in her party
• CBRT: domestic banks to be allowed to borrow 1-month FX deposits (prev. only 1 week); lowers RRR for all TRY liabilities by 250bps; FX RRR lower by 400bps on 1-3y maturities; steps taken will provide liquidity of TRY 10b, USD 6b and equivalent USD 3b in gold
• Italian govt. reportedly had talks with the ECB regarding possibilities and consequences of speculator attacks against Italy; Salvini says law raising retirement age will be dismantled whether the EU likes it or not
• PBOC: will not use the yuan as a tool to cope with trade tensions and it will not conduct any “strong” economic stimulus
• Russia Finance Minster confirms stoppage of FX buying for reserves, in order to help support RUB; USD is becoming a risky payment instrument, does not rule out switching to national currencies in its oil supply deals
• Oil traded near $68 a barrel after Iran ruling out talks with the U.S. heightened concerns over global supply, offsetting signs of a potential increase in American output

Asian equity markets began the week lower across the board with sentiment in the region spooked on spill-over concerns as the Turkish lira extended on last week’s slump following a defiant tone from Turkish President Erdogan, which triggered capital control concerns and who labelled the weakness in TRY as a ‘currency plot’. This pressured the major indices from the getgo with ASX 200 (-0.4%) dragged by mining names, while Nikkei 225 (-2.0%) underperformed on safe-haven flows into JPY and with Mitsui Mining & Smelting down 15% post-earnings. Elsewhere, Shanghai Comp. (-0.3%) and Hang Seng (-1.5%) were also heavily weighed alongside the broad EM-triggered mayhem and continued liquidity inaction by the PBoC. Finally, 10yr JGBs were higher with prices underpinned by safe-haven demand, although upside was also capped amid a lack of Rinban announcement with the BoJ only in the market for Treasury discount bills.

Top Asian News

• China Faces Problem in Getting Its Banks to Lend More Money
• Chinese Education Stocks Take a Tumble on Draft Rule Uncertainty
• India FinMin Is Said to Favor More RBI OMO Bond Purchases

European equities kick-start the week lower across the board (Eurostoxx 50 -0.6%) with sentiment in the region soured by contagion concerns as the Turkish Lira extends on last week’s slump. As such, Turkey-exposed banks plumb the depths again with BNP Paribas (-1.0%), BBVA (-3.7%) and Unicredit (-3.2%) all near the foot of their respective bourses. Elsewhere, Germany’s DAX 30 is dragged lower by its third largest constituent, Bayer (-11.2%), after recently acquired Monsanto was ordered to pay USD 289mln in fines as a court ruled the company’s weedkiller caused cancer

Top European News

• Turkey Central Bank Takes Steps to Support Banks as Lira Slides
• May Is Said to Weigh Brexit Fix that Keeps EU Rules for Longer
• Erdogan Effectively Rules Out a Quick End to Turkish Crisis

In FX, the Lira remains front and centre of attention after more rousing attempts by Turkish President Erdogan to shore up the currency and coral support from the international investor community largely fell on deaf ears, with Usd/Try soaring through 7.0000 to a new record peak around 7.2150, and prompting the CBRT into action. However, still unable to intervene via conventional means (ie rate hikes) the Bank resorted to cutting Reserve Requirement Ratios for non-core FX liabilities by 400 bp alongside the Lira Required Reserve by 250 bp for all maturities, and the relief has been relatively limited as a result. EM – Lira contagion has spread further across the region, with the Rand hit especially hard (Usd/Zar 15.4700+ at one stage , but the Idr, Twn and other Asian units also weakening to intervention tolerance levels, while the Mxn has unwound more NAFTA-related gains to trade back below 19.0000 vs the Usd. DXY – Riding high amidst all the turmoil in high-beta/risk/yield currency counterparts, with the index just off fresh 2018 highs at 96.530, and now looking at chart targets ahead of 97.000 with fair resistance seen around 96.841. JPY – Still bucking overall trends and outperforming due to its ultra safe-haven allure, with Usd/Jpy pulling back further from 111.00 and through 110.50 to test the water ahead of 110.00 where decent expiry option interest resides (1.3 bn up to 110.05 to be precise).

US Event Calendar

• Aug. 13-Aug. 17: Mortgage Delinquencies, prior 4.63%
• Aug. 13-Aug. 17: MBA Mortgage Foreclosures, prior 1.16%

 

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Several hours after Turkey unveiled its first tentative steps toward capital controls when the country’s banking regulator imposed a limit on the amount of foreign currency and lira swap and swap-like transactions (not to exceed 50% of the bank’s shareholder equity) yet failed to halt the collapse in the Turkish lira, the Turkish central bank made its first move to support the financial system and investor confidence.

Early on Monday morning, just after 1am EDT, the Turkish central bank issued a statement in which it promised to “take all necessary measures,” and lowered the amount commercial lenders must park at the regulator while easing rules that govern how they manage their lira and foreign-currency liquidity. And while the monetary authority said all options were on the table, there was no mention of the one thing the market was eagerly looking for, namely higher interest rates.

The central bank said easing the reserve requirements would release as much as 10 billion liras, $6 billion in dollars and $3 billion worth of gold. It also eased collateral rules and tripled the amount of liras banks can borrow in return for their FX holdings to €20 billion. The $50 billion limit on the amount of foreign-exchange banks can borrow in return for their lira assets can also be changed if needed, it said.

The full list of measures announced by the central bank which it said “will support financial stability and proper functioning of markets” was the following:

• The bank revised discount rates used against lira transactions to provide lenders with flexibility in their collateral management: “Through this regulation, the discounted value of banks’ current unencumbered collaterals is projected to increase by approximately 3.8 billion Turkish liras”
• FX deposit limits for Turkish lira transactions of commercial lenders were raised to 20BN euros from 7.2BN.
• When needed, in addition to one week repo, the bank may hold “traditional repo auctions or deposit selling auctions may be held with maturities no longer than 91 days.”
• When there is higher funding gap than usual, more than one repo auction per day can be conducted with maturities of 6-to-10 days.
• Banks will be able to borrow FX deposits in one- month maturity in addition to the current, one-week instrument they have: “Banks’ current foreign exchange deposit limits of around 50 billion dollars may be increased and utilization conditions may be improved if deemed necessary.”

In all, the central bank said it “will closely monitor the market depth and price formations, and take all necessary measures to maintain financial stability, if deemed necessary,” according to the statement released early Monday.

The central bank’s anticipated  intervention was part of a plan announced by Treasury and Finance Minister, and Erdogan’s son-in-law Berat Albayrak late Sunday, when he also rejected capital controls as an option to stem outflows of hard currency – even as the bank regulator hinted at just that – and vowed to crack down on those he said were spreading damaging rumors that deposits would be seized.

Indeed, in what may be a more problematic, if expected, part of Turkey’s intervention, the Istanbul Chief Prosecutor started a probe against “persons who have carried out actions that threaten economic security,” according to state-run Anadolu Agency.

Separately, Capital Markets Board in Ankara issues warning about “misleading news” on markets: “Those who report misleading, wrong and false stories” on listed companies, banks and other financial entities that could impact investor decisions could be fined or sentenced to two to five years of imprisonment, the regulator said on its website, in taking a page of Erdogan’s own personal style of dealing with opponents.

Following Albayrak’s comments, we reported that the banking regulator put restrictions on dollar-lira swaps in an attempt to make it harder for offshore investors to bet against the currency.

And yet, as Bloomberg reported, while the central bank action was more comprehensive, its use of fringe tools is unlikely to be a “game changer” for the lira, Global Securities analysts including Research Director Sertan Kargin said in an emailed report.

“The latest liquidity measures could provide some buffer to cushion the lira against speculative moves,” the report said. But, it said, the move “remains insufficient to provide full protection for the lira in times of distress in the absence of an outright orthodox rate hike.”

And as Erdogan made quite clear in his latest speech on Sunday, both a rate hike and an IMF intervention remain solidly off the table for now.

As a result, whereas the central bank’s intervention did briefly stem the losses in the TRY, pushing it back above 6.50 against the dollar, since then the currency has resumed its slide and is back to the level it traded at for much of the overnight session, just around 6.90, and down nearly 25% over the past 2 days.

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Authored by Soeren Kern via The Gatestone Institute,

Former foreign secretary (and possible future prime minister) Boris Johnson sparked a political firestorm after making politically incorrect comments about the burka and the niqab, the face-covering garments worn by some Muslim women.

The ensuing debate over Islamophobia has revealed the extent to which political correctness is stifling free speech in Britain. It has also exposed deep fissures within the Conservative Party over its future direction and leadership.

Pictured: Boris Johnson (the Foreign Secretary) leaves 10 Downing Street following a cabinet meeting on June 12, 2018 in London, England. (Photo by Chris J Ratcliffe/Getty Images)

In an August 5 essay published by the Daily Telegraph, Johnson argued that he was opposed to Denmark’s burka ban because the government should not be telling women what they may or may not wear in public. Johnson wrote:

“What has happened, you may ask, to the Danish spirit of live and let live? If you tell me that the burka is oppressive, then I am with you. If you say that it is weird and bullying to expect women to cover their faces, then I totally agree — and I would add that I can find no scriptural authority for the practice in the Koran. I would go further and say that it is absolutely ridiculous that people should choose to go around looking like letter boxes….

“If a constituent came to my MP’s surgery [one-on-one meetingsbetween MPs and their constituents] with her face obscured, I should feel fully entitled… to ask her to remove it so that I could talk to her properly. If a female student turned up at school or at a university lecture looking like a bank robber, then ditto: those in authority should be allowed to converse openly with those that they are being asked to instruct.”

The response from senior Conservatives was immediate.

Prime Minister Theresa May said that Johnson “was wrong” in the language he used to describe women who use the burka. She added that Johnson had “clearly caused offense” and demanded that he apologize:

“I do think that we all have to be very careful about the language and terms we use. And some of the terms Boris used describing people’s appearance obviously have offended. What’s important is do we believe people should have the right to practice their religion and, in the case of women and the burka and niqab, to choose how they dress. I believe women should be able to choose how they dress.”

Conservative Party Chairman Brandon Lewis also called for Johnson to apologize, as did a long list of current and former ministers and MPs. Former Attorney General Dominic Grieve threatened to quit the party if Johnson became leader.

Tory peer Mohamed Sheikh, founder of the Conservative Muslim Forum, said that Johnson had “let the genie out of the bottle” and called for Johnson to be removed from the party.

Conservative Member of the House of Lords Sayeeda Warsi — who herself has saidthat she hopes women in Britain will stop wearing the Islamic face veil within the next 10 or 20 years — accused Johnson of “Islamophobia” and said he should be required to attend diversity training:

“In his Telegraph piece, Johnson was making a liberal argument. He was saying that we shouldn’t ban the burqa, as Denmark has done. But his words signaled something else. He said — not only to those Muslim women who veil, but to many more who associate with a faith in which some women do — that you don’t belong here….

“He set out a liberal position, but he did it in a very ‘alt-right’ way. This allowed him to dog-whistle: to say to particular elements of the party that he’s tough on Muslims. Yet again, he’s trying to have his cake and eat it….

“An apology is now due. But what happens if, as looks likely, it doesn’t come? Every time incidents like this occur in the party and there are no consequences, it sends out a clear message that you can get away with Islamophobia.

“As far as Boris Johnson is concerned, this is surely time for the promised diversity training scheme to kick in.”

Johnson has refused to apologize, and the Conservative Party has now launched an inquiry into whether Johnson’s comments violated its code of conduct, which states that Tory officials and elected representatives must “lead by example to encourage and foster respect and tolerance” and not “use their position to bully, abuse, victimise, harass or unlawfully discriminate against others.”

Britain’s most senior police officer, Met Police Commissioner Cressida Dick, saidthat she had consulted hate-crime specialists and determined that Johnson’s comments did not break the law:

“I know that many people have found this offensive. I also know that many other people believe strongly that in the whole of the article, what Mr Johnson appears to have been attempting to do was to say that there shouldn’t be a ban and that he was engaging in a legitimate debate.

“I spoke last night to my very experienced officers who deal with hate crime and, although we have not yet received any allegation of such a crime, I can tell you that my preliminary view having spoken to them is that what Mr Johnson said would not reach the bar for a criminal offence.”

Johnson’s supporters jumped to his defense. North East Somerset MP Jacob Rees-Mogg said:

“It’s hard to see what he should apologise for. He has defended people’s right to wear the burka whilst saying it is an inelegant garment. Neither of those proposals are unreasonable.”

Tory MP Andrew Bridgen accused May of orchestrating a politically motivated “witch hunt” against Johnson:

“I believe this is politically motivated, by the internal politics of the Tory party, by politicians who want to humiliate and destroy Boris Johnson. I believe that the public will see this for what it is — an internal Conservative party witch hunt instigated by Number Ten against Boris Johnson, who they see as a huge threat.”

In a blog post, Bridgen elaborated:

“Looking at those who have jumped on the bandwagon of protest, the vast majority appear to be ardent Remain campaigners, who still bewildered that the public could have a different viewpoint to them, still seek to lay the blame at their defeat at the door of Boris Johnson. These same people remained stoney silent when lifelong Remainer Ken Clarke enlightened us with his views of the burka: ‘I do think it’s a most peculiar costume for people to adopt in the 21st century, but that’s not to me for decide, when they’re not engaged in some serious issue such as giving evidence. That’s the bit that I think it’s almost impossible to have a proper trial if one of the persons is in a kind of bag’…

“It is clear that this is not about standing up for the rights of Muslim women to wear the burka, if that is what they really want to do? This is about getting Boris. The great irony of all of this is many EU Countries who those criticising Boris are desperate to stay in political union with have in fact banned the burka. Not the fringe countries but France, Germany, Austria, Belgium, Bulgaria and now Denmark, with a partial ban even in the uber-liberal Netherlands.

“I myself, am the chairman of the All-Party Parliament Group for Uzbekistan, a country which is 90% Muslim, enjoys great religious harmony and interestingly which banned face coverings in 1992.

“Unfortunately, in using this issue as a stick to beat Boris, Theresa May and some of the members of her government have shown themselves to be once again totally out of step with the views of the majority of members of the Conservative Party and indeed of the public as a whole.”

The former leader of the UK Independence Party (UKIP), Nigel Farage, wrote:

“I wonder how many of those who are now jumping up and down calling for Johnson to have the Conservative whip withdrawn [disciplinary measure], or to be expelled from the party altogether, actually read his original Telegraph article which has apparently offended them so much. Had they done so, they would surely remember that he states he does not believe the burka and niqab should be banned in Britain – a ban which is already in full force in EU nations like France, Germany, Denmark, Austria and Belgium.

“Having set out his liberal position, he then augments it by taking up the feminist argument that he thinks it is ‘oppressive’ to force women to cover their faces in public. For emphasis he offers his opinion that it is ‘weird’ and ‘bullying’ to expect them to do so. And then he says it is ‘ridiculous’ that women should go around ‘looking like letter boxes’.

“Absurdly, this opinion has been seized upon as ‘Islamophobic’ or ‘racist’. An essentially liberal commentator is being pilloried for expressing his belief using, what I accept, is rather playful language. But to suggest he should be kicked out of his party is nothing but lunacy. To Boris I say: stand firm…

“Taken to its logical conclusion, the anti-Johnson brigade’s stance would mean that nobody is allowed to offer their view on any matter in case it causes offence. Is that really the kind of country we want to live in? Remember – ironically, we are talking in this case about a politician who has stated he thinks it illiberal to ban the burka…

“We live in a country that used to believe passionately in free speech. As we all know, even when exercised with care and responsibility, free speech can and does offend some people. But timid politicians who take the easy option and prefer not to tell people what they really think about things like the burka are killing this vital right.

“By allowing politics to become too PC, they are damaging democracy in such a way that it will be extremely difficult for future generations to repair, ultimately condemning them to a society where nobody is allowed to be honest about anything.”

An imam at Oxford Islamic Congregation, Taj Hargey, wrote that Johnson did not go far enough:

“Boris Johnson should not apologise for telling the truth. His evocative analogy is unfortunate but he is justified in reminding everyone that the Wahhabi/Salafi-inspired fad of female facial masking has no Koranic legitimacy. It is, however, a nefarious component of a trendy gateway theology for religious extremism and militant Islam.

“The burka and niqab are hideous tribal ninja-like garments that are pre-Islamic, non-Koranic and therefore un-Muslim. Although this deliberate identity-concealing contraption is banned at the Kaaba in Mecca it is permitted in Britain, thus precipitating security risks, accelerating vitamin D deficiency, endorsing gender-inequality and inhibiting community cohesion.

“It is any wonder that many younger women have internalised this poisonous chauvinism by asserting that it is their human right to hide their faces?

“Johnson did not go far enough. If Britain is to become a fully integrated society then it is incumbent that cultural practices, personal preferences and communal customs that aggravate social division should be firmly resisted.”

Rowan Atkinson, a British comedian also known as Mr. Bean, defended Johnson:

“As a lifelong beneficiary of the freedom to make jokes about religion, I do think that Boris Johnson’s joke about wearers of the burka resembling letterboxes is a pretty good one. All jokes about religion cause offence, so it’s pointless apologising for them. You should really only apologise for a bad joke. On that basis, no apology is required.”

A Sky Data Poll published on August 8 found that 60% of Britons surveyed said that it is not racist to compare Muslim women wearing burkas to bank robbers and letter boxes, while 59% were in favor of a burka ban.

An August 1 poll of Tory members by ConservativeHome found that Johnson’s popularity had almost quadrupled since he resigned on July 9 after clashing with May over her vision for Brexit.

He is now at the top of the list of favored successors to May.

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