Turkey

It was only a few days ago that Emerging Market FX was rallying on the back of a Turkish Central Bank rate hike that "fixed" everything. It was only a few days ago that investors were told they were "stupid" if bearish on US stocks because of EM weakness. Things have not gone as planned. That temporary blip has been demolished and EM FX has crumbled lower to fresh 5-year lows with many hitting record lows... and no, this does not mean money will flow back into US stocks (as we exclaim below).

The event horizon of bad faith is the exact point where the credulous folk of this modern age, from high to low, discover that their central banks only pretend to be regulating agencies, that they ride a juggernaut of which nobody is really in control. The illusion of control has been the governing myth since the Lehman moment in 2008. We needed desperately to believe that the authorities had our backs. They don’t even have their own fronts. Is the money world at that threshold right now?

The key events this week are have non-farm payrolls (consensus 181K) and unemployment rate (consensus 6.7%). There is also going to be a number of speeches given by Fed policymakers.  Production surveys from the US (ISM) and other parts of the world are due Monday. We also get trade balance updates from the English-speaking economies - US, UK, Australia and Canada. Finally, keep track on inflation data from Italy and Turkey: the latter is important to track given current high correlation among 'fragile' EM currencies.

At one time it was the tough that got going when things started to get rough. Now, it’s just the money-minded that look, watch, and act before you know what has hit you.

Yes, it is true that, just as had happened six months ago when the Fed first started its public ruminations about whether and when to start to reduce its stimulus, emerging markets have suffered a further bout of turbulence and it is also true that some of these are facing increasingly fraught social and political tensions, to boot. The cynic would say that such periods of upheaval are almost intrinsic to their designation as "emerging" but he would also be quick to point out that such susceptibilities are supposed to be rewarded with either a yield premium or its converse, a price discount. The ironists among market punters will even attempt to construe all this as a reason to buy more developed world stocks on the premise that the money flooding out of such places as Thailand, the Ukraine, Turkey, and Argentina will be parked in the S&P and the DAX (perhaps overlooking the fact that the purchase price of these now-unwanted positions was most likely borrowed, meaning that their liquidation will also extinguish the associated credit, not re-allocate it). The Goldilocks lovers will also tend to assume that any such disruption will serve to delay the onset of genuine tightening and may even induce further ill-advised stimulus measures on the part of the major central banks.

But at the end of the day, if your creditors lost faith in your ability to repay it… it’s GAME OVER. This is hitting the emerging market space today.

Back in December 2013, as we do after every periodic bout of irrational exuberance by Goldman's chief economist Jan Hatzius et al (who can forget our post from December 2010 "Goldman Jumps Shark, Goes Bullish, Hikes Outlook" in which Hatzius hiked his 2011 GDP forecast from 1.9% to 2.7% only to end the year at 1.8%, and we won't even comment on the longer-term forecasts) designed merely to provide a context for Goldman's equity flow and prop-trading axes, we said it was only a matter of time before Goldman (and the rest of the Goldman-following sellside econo-penguins) is forced to once again trim its economic forecasts. Overnight, two months after our prediction, the FDIC-backed hedge fund did just that, after Goldman's Hatzius announced that "we have taken down our GDP estimates to 2½% in Q1 and 3% in Q2, from 2.7% [ZH: actually 3.0% as of Thursday] and 3½% previously."

A classicial economist... and Harvard professor... preaching to the world that one's money is not safe in the US banking system due to Ben Bernanke's actions? And putting his withdrawal slip where his mouth is and pulling $1 million out of Bank America? Say it isn't so...

2014? Well now, THIS could be the year that true price discovery begins in the gold market. If that turns out to be the case, it will be driven by a scramble to perfect ownership of physical gold; and to do that you will be forced to pay a lot more than $1247/oz. 

With the IMF frantically scrambling to cover its forecast errors and model-breakdowns amid an emerging market turmoil that no one could have seen coming, the contagion is beginning to spread. With all eyes fixed on Turkey (unfixed again) or Ukraine (never fixed), Argentina's troubles are exploding. The last few days have seen yields on their 2017 bonds scream higher from 11% to 19%... and 2015 Boden prices collapse.

Over the past week we took our fair share of jabs at SocGen EM FX analyst Benoit Anne (the one who said "Governor Basci, You Have Avoided A Domino Crisis In EM"... er, oops?) . They were all in good humor - after all when it comes to sheer contrarian cluelessness nobody, and we mean nobody in the known world, can even reach Tom Stolper's toe nail, whose fades have resulted in over +12,000 pips on these pages alone over the past 5 years. Which is why we follow up the comedy with something more serious: now that the honeymoon is over, Anne has put together a solid compendium on how to trade the EM meltdown, with an emphasis on defensive strategies. Considering the tapering will continue for a long time, and as GaveKal explained yesterday, someone will have to lose (big) before EM normalcy returns, we urge anyone with EM exposure to read this.

The wild volatility continues, with markets set to open well in the negative wiping out all of yesterday's gains and then some, only this time the catalyst is not emerging market crashing and burning (at least not yet even though moments ago the ZAR weakened to a new 5 year low against the USD and the USDTRY is reaching back for the 2.30 level) but European inflation, where the CPI printed at 0.70%, dropping once again from 0.8%, remaining under 1% for the fourth straight month and missing estimates of a pick up to 0.9%. Perhaps only economists are surprised at this reading considering last night Japan reported its highest (energy and food-driven) inflation print in years: so to explain it once again for the cheap seats - Japan is exporting its "deflation monster", Europe is importing it. It also means Mario Draghi is again in a corner and this time will probably have to come up with some emergency tool to boost European inflation or otherwise the ECB will promptly start to lose credibility - is the long awaited unsterilized QE from the ECB finally imminent?

Hinting that the worst is yet to come, was none other than India's Central Bank governor Raghuram Rajan himself, who yesterday in an interview in Mumbai with Bloomberg TV India, said that "international monetary cooperation has broken down." Of course, when the Fed was monetizing $85 billion each and every month and stocks could only go up, nobody had a complaint about any cooperation, be it monetary or international. However, a 4% drop in the S&P from its all time high... and everyone begins to panic.

The problem is twofold. First, current accounts are a zero sum game, so future improvements in emerging market trade balances have to come at someone else’s expense. Second, we have had, over the past year, only modest growth in global trade; so if EM balances are to improve markedly, somebody’s will have to deteriorate. When the 1994-95 “tequila crisis” struck, the US current account deficit widened to allow for Mexico to adjust. The same thing happened in 1997 with the Asian crisis, in 2001 when Argentina blew, and in 2003 when SARS crippled Asia. In 1998, oil prices took the brunt of the adjustment as Russia hit the skids. In 2009-10, it was China’s turn to step up to the plate, with a stimulus-spurred import binge that meaningfully reduced its current account surplus. Which brings us to today and the question of who will adjust their growth lower (through a deterioration in their trade balances) to make some room for Argentina, Brazil, Turkey, South Africa, Indonesia...? There are really five candidates...

UPDATE: The miss by GOOG and AMZN (accounting for 13% of Nasdaq market cap) is pushing indices lower after hours...

The S&P 500 And Russell bounced once again off post-December-Taper unchanged levels today but the Dow remains flat from 12/18 as the Nasdaq (led by exuberance in momo social media stocks as AAPL closed <$500) jumped the most in almost 4 months (though remains -1% on the year). The rally in stocks was simply remarkable for its tick-for-tick tracking of USDJPY and EM FX and the S&P was unable to make significant progress past its pre-Turkish-rate-hike levels. Treasuries sold off but remain 3-5bps lower in yield than when Turkey was "fixed". The USD rallied on EUR and JPY weakness (but was almost entirely dead once Europe closed). Precious metals were manhandled instantaneously lower at 8amET then spent the rest of the day trying to recover. Stocks did tumble into the close to recouple with USDJPY but bad news was great news it seems...(for now)