Capital Markets: "Turkey Drives Risk-Off, but Pressure Abating"

From Marc to Market:

The failure of Turkey to grab the bull by the horns, so to speak, and come to grips with the situation saw the dollar soar above TRY7.23(from TRY6.43 at the end of last week) and to ZAR15.55 (from ZAR14.09). The Mexican peso, the strongest currency this year, and which has been partially protected by prospects of a new NAFTA agreement has suffered as well. The dollar finished last week near MXN18.91, having advanced by more than 1% for the second sessions, surged above MXN19.37 today.

The risk-off moment is evident in the European periphery, where Italy's 10-year benchmark has been lifted above 3%. Spanish, Portugal and nearly all European yields are rising, but Germany. The US benchmark yield is a basis point lower.

The MSCI Emerging Markets index gapped lower and is off 1.75%. It has come within a quarter of a percentage point of the June low which was the lowest level since July 2017. The gap in the MSCI Asia Pacific Index was a little larger, and the stability seems more fragile. The low for the year was set in early July is less than 0.5% away. Of note, Chinese and India markets have fared among the best, with their major indices losing less than 0.5%. The dollar rose to almost CNY6.8850 today. The year's high was set on August 3 just shy of CNY6.90.

The measures announced by the Turkish government seem woefully inadequate. Required reserves were cut, which may have freed up around TRY10 bln and eased some collateral rules and boost the among of lira that can be borrowed against euro and dollars. There appear to be some de facto capital controls, such as restrictions on fx swaps, but broad capital controls were rejected. Efforts to crack down on social media seems little more than a distraction.

Even the triple-A rated Australia was not immune to the pressures, though bonds were firm. The local equity market lost about 0.4%, though saw gains in utilities, information technology, and energy. The Australian dollar is the weakest of the major currencies, nursing a 0.5% loss (~$0.7265). The yen is the strongest of the majors, rising almost 0.4% against the greenback. The dollar approached the JPY110 area, where 1 $1 bln expiring option is struck, before recovering in the European morning toward JPY110.50.

European equities are lower, but the pace is modest.. ...

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