Deepening Turkish Crisis Kindles Contagion Fears

August 13, 2018

The dollar has appreciated another 8.7% against the Turkish lira and is hovering around 7/USD. The lira touched a record low of 7.2 per dollar earlier. Turkish share prices have fallen 4.7%, and the 10-year Turkish sovereign debt yields climbed 51 basis points to 21.18%.

Turkey’s central bank pumped fresh liquidity into money market by slashing required reserve requirements today but failed to take the step that investors want to see — a further hike in interest rates. The RRR on lira deposits was cut 250 bps and that on non-core FX liabilities up to 3-year maturities has been reduced by 4 percentage points.

The U.S. dollar also rose 2.7% against the South African rand, 1.8% versus the Mexican peso, 1.7% relative to the Brazilian real, and 0.8% vis-a-vis the Indian rupee. Despite the unique geopolitical nature of the Turkish lira’s latest woes, the Turkish economy also has serious economic imbalances — inflation of about 16% and rising, a current account deficit equal to 6% of GDP, and monetary policy that has failed to get ahead of the problems because of pressure from Turkey’s autocratic President Erdogan, who wants interest rates to be cut, not raised. Other emerging economies also have economic imbalances, and fear is mounting that foreign banks holding Turkish debt will be infected by Turkey’s crisis. History is rich with examples of an economic crisis in one relatively small economy jumping near and far to other economies.

Stock markets in Asia and Europe were slammed by Turkey’s crisis. Share prices plunged 3.6% in Indonesia, 2.1% in Taiwan, 2.0% in Japan, 1.8% in Hong Kong, 1.5% in South Korea, and 1.2% in Singapore. Among European markets, equities so far have dropped today by 1.8% in Greece, 1.1% in Spain, 1.0% in Italy, 0.6% in Germany and Switzerland, and 0.5% in France.

In addition to the aforementioned rise in the U.S. currency against emerging market monies, the dollar has advanced 0.5% against the yuan, 0.3% relative to the euro, Aussie dollar, and loonie, and 0.1% versus sterling. An exception is the yen, which has safe haven properties of its own. Japan’s currency is 0.4% firmer against the dollar.

Ten-year sovereign debt yields dipped a basis point in the U.S., Germany, and Japan.

Among commodities, gold and copper are down 0.8% and 0.6%, while WTI crude oil slipped 0.3%.

The purchasing manager surveys for July reported today showed 3-month and 2-month lows in non-oil activity in the U.A.E. and Saudi Arabia of 55.8 and 54.9, respectively, but a 3-month high of 50.3 in Egypt’s non-oil PMI score. Ireland’s construction PMI printed 2.3 points higher in July at a 2-month high of 60.7, and New Zealand’s service-sector PMI also scored a 2-month high, jumping 2.4 points to a reading of 55.1.

Italian CPI inflation climbed to a 15-month of 1.5% in July from 1.3% in June, 1.0% in May and 0.5% in April. Core inflation of 0.7% was only half as much as total inflation, and it was also 0.1 percentage point lower than in June.

Singaporean GDP growth last quarter was revised downward from an earlier estimate of 1.0% on quarter to 0.6%. On-year growth of 3.9% was down from 4.5% in the first quarter of 2018.

New Zealand food prices rose 0.7% on month and 1.1% on year in July.

Romania’s June current account shortfall of EUR 1.001 billion was the biggest deficit in 14 months and resulted in a EUR 3.78 billion deficit for the first half. That was 7% greater than a year earlier. The full-2017 current account gap equaled 3.4% of Romanian GDP.

Dutch retail sales fell 0.4% in June but were 2.8% greater than a year earlier.

The cumulative U.S. federal government deficit through July this fiscal year of $684 billion was 20.8% wider than a year ago.

Copyright 2018, Larry Greenberg. All rights reserved. No secondary distribution without express permission.


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