The "manic Monday" turmoil that rocked global markets at the start of the week, eased during Asian hours on Tuesday and followed through in the European session sending global markets higher as most European stocks tracked gains across most Asian equities as global markets steadied. The catalyst: after its latest furious plunge, the Turkish lira recovered much of yesterday’s loss while the yen slumped sending the Nikkei 2.3% higher and the dollar slipped from its highest in 14 months and Treasuries fell.
The Turkish lira jumped 5% and the country’s benchmark equity index rose 1.3% even as the diplomatic standoff between Turkey and the U.S. dragged on. The market remained unfazed even after president Erdogan vowed to boycott US electronic goods and after National Security Adviser Bolton warned Turkey’s ambassador on Monday that the U.S. has nothing further to negotiate until a detained American pastor is released.
According to media report, the lawyer for Pastor Brunson filed an appeal to release the Pastor from house arrest and lift his travel ban. The Turkish foreign minister said a US Consular official is set to visit Pastor Brunson today.
In his latest defiant speech, Erdogan also said that Turkey is taking the necessary measures regarding the economy and that it is important to keep a firm political stance. Separately, the Turkish Central Bank opened their FX Repo auction, with the interest rate at 19.25% for TRY (vs. 17.75% Prev.) and 2.00% for USD. They did not open their Repo auction.
In Europe, the Stoxx Europe 600 Index climbed alongside US index futures as Italian debt fears eased, while the euro edged lower. The German economy accelerated in the second quarter, driven by stronger domestic consumption and a slight pickup in investment. U.K. unemployment dropped to a new 43-year low in the three months through June but the pace of wage growth eased. The jobless rate stood at 4%, the least since February 1975, the Office for National Statistics said on Tuesday. Economists had expected it to stay at 4.2 percent. Still, the FTSE was the underperforming bourse, weighed on by mining names. This came in the wake of poor Antofagasta earnings, which were hit by a 16% drop in core earnings, and are close to the foot of the Stoxx 600.
In Asia, rhe ASX 200 rose +0.8% and the Nikkei 225 was +2.3% higher with Australia lifted by a broad positive tone across nearly all sectors and as focus shifted back to earnings, while Japan outperformed as exporters coat-tailed on a rebound in USD/JPY. Meanwhile, shares in Shanghai and Hong Kong dipped after disappointing data in which Industrial Production, Retail Sales and Fixed Urban Assets all missed estimates and the Unemployment Rate also increased.
In FX, the Turkish lira rallied the most among world currencies against the dollar while the Bloomberg Dollar Spot Index slipped for the first time in four days. In a sign that investors are still trying to work through the implications of Turkey’s meltdown, the Indian rupee hit the 70-per dollar mark, a record low.
In the latest Brexit news, Tory Brexiteers are said to be planning to challenge PM May by publishing their own blueprint favouring a hard Brexit. The paper is due to be published next month and is expected to have the backing of 60 to 80 Conservative MPs. It is understood the paper is to allow a possible Canadian-style free trade agreement, only if the EU backs down on demands over the Irish border.
The oil market benefited from the return to a positive risk tone and has erased the previous sessions losses, with both WTI and Brent up ~0.8% on the day, with traders looking ahead to the latest API release with expectations set to show a draw in Crude by 3.27mln, Distillates to build by 0.9mln and Gasoline to draw by 0.8mln. In the metals scope, Gold is flat whilst copper has fallen for the third day straight and pushed YTD losses to 16% as poor Chinese retail sales data suggests demand could slow from the Asian country. Silver (+0.7%), platinum (+0.9%) and palladium (+0.1%) were all beneficiaries of the improved risk sentiment, however, with all of the precious metals up on the day.
- S&P 500 futures up 0.4% to 2,835.25
- Brent futures up 1% to $73.35/bbl
- Gold spot up 0.1% to $1,195.08
- U.S. Dollar Index down 0.1% to 96.29
- STOXX Europe 600 up 0.4% to 386.25
- MXAP up 0.5% to 163.13
- MXAPJ down 0.08% to 527.37
- Nikkei up 2.3% to 22,356.08
- Topix up 1.6% to 1,710.95
- Hang Seng Index down 0.7% to 27,752.93
- Shanghai Composite down 0.2% to 2,780.97
- Sensex up 0.7% to 37,913.86
- Australia S&P/ASX 200 up 0.8% to 6,299.64
- Kospi up 0.5% to 2,258.91
- German 10Y yield rose 1.6 bps to 0.327%
- Euro down 0.01% to $1.1409
- Italian 10Y yield rose 10.7 bps to 2.829%
- Spanish 10Y yield fell 2.0 bps to 1.434%
Top Overnight News from Bloomberg
- The German economy accelerated in the second quarter, driven by stronger domestic consumption and a slight pickup in investment
- U.K. unemployment dropped to a new 43-year low in the three months through June but the pace of wage growth eased. The jobless rate stood at 4 percent, the least since February 1975, the Office for National Statistics said on Tuesday. Economists had expected it to stay at 4.2 percent
- A car crashed into the barriers outside Britain’s Parliament on Tuesday, leaving several pedestrians injured. Police said they had arrested the driver
- A rally in bonds from China’s local government finance vehicles, sparked by the recent easing measures, may be at risk of losing momentum after a surprise bond default by a state-owned firm on Monday
- A slew of data, including industrial output and retail sales, suggested that China’s economy hit a mid-year rough patch as efforts to curb risky lending and excessive debt collided with a deepening trade war
- Yuan’s trading band will be further widened and the currency will eventually become a free float, PBOC-run Financial News says in a front-page report, citing an unidentified expert
- Japanese retail investors are dumping the Turkish lira as a sell-off that saw the currency sink to a record low on Monday shows few signs of abating
Asian equity markets traded mixed as some of the regional bourses shrugged off the negative lead from Wall Street where the S&P 500 and DJIA declined for a 4th consecutive day amid the Turkey-triggered turmoil, although China underperformed as participants digested weaker than expected data. ASX 200 (+0.8%) and Nikkei 225 (+2.1%) were higher with Australia lifted by a broad positive tone across nearly all sectors and as focus shifted back to earnings, while Japan outperformed as exporters coattailed on a rebound in USD/JPY. Elsewhere, Hang Seng (-0.6%) and Shanghai Comp. (-0.2%) underperformed their peers and traded negative amid disappointing data in which Industrial Production, Retail Sales and Fixed Urban Assets all fell short of estimates and the Unemployment Rate also increased. Finally, 10yr JGBs were weaker amid the improved risk appetite in Japan with prices also subdued by the absence of the BoJ’s bond buying program from the market today. PBoC skipped open market operations for a net neutral daily position.
Top Asian News
- China Growth Momentum Stalls as Debt Campaign and Trade War Bite
- Smartphone Suppliers Lead Tech Stock Selloff in Hong Kong
- China Literature Falls After $2.3 Billion New Classics Deal
- Jet Airways Lenders Are Said to Be Wary of Giving New Loans
European equities started the day firmer (Euro Stoxx 50 +0.2%) however gains have been trimmed as Erdogan continues his defiant tone. The FTSE is the underperforming bourse, weighed on by mining names. This coming in the wake of poor Antofagasta earnings, which were hit by a 16% drop in core earnings, and are close to the foot of the Stoxx 600.
Top European News
- Car Crashes Into U.K. Parliament Barriers; Police Arrest Driver
- U.K. Unemployment Falls to New 43-Year Low But Pay Growth Slows
- Stronger Euro-Area Economic Growth Defies Trade War Threats
- Italy Bonds Rally as Budget Concerns Ebb, Lira Takes a Breather
In FX, a more concerted TRY recovery filtered through the region and beyond again, with a broad improvement in other ‘risky’ currencies and sentiment overall. The Lira is currently pivoting 6.5000 vs the Usd vs 7.2000+ levels at one stage yesterday, as the CBRT augments its RRR interventions via a hike in financing costs at the latest FX auction, albeit not actually opening the repo for a 2nd day presumably due to no excessive demand for extra funds/liquidity. Elsewhere, the Rand, Rouble and Peso are also paring heavy losses, for the time being at least after similar rebounds in Asian counterparts overnight, bar the Yuan that was undermined buy a raft of sub-consensus Chinese data overnight and yet another higher Usd/Cny midpoint fixing. The DXY index remains underpinned above 96.000, but equally toppy around 96.500 with moves largely emanating from basket components and pairings on the back of Try/EM fluctuations. Indeed, the DXY and broad Usd traded down to lows when the Lira was around 6.4000 peaks, but then bounced after the latest speech from Turkish President Erdogan as the Try lost momentum.
In commodities, the oil market is benefitting from the return to a positive risk tone and has erased the previous sessions losses, with both WTI and Brent up ~0.8% on the day, with traders looking ahead to the latest API release with expectations set to show a draw in Crude by 3.27mln, Distillates to build by 0.9mln and Gasoline to draw by 0.8mln. In the metals scope, Gold is flat whilst copper has fallen for the third day straight and pushed YTD losses to 16% as poor Chinese retail sales data suggests demand could slow from the Asian country. Silver (+0.7%), platinum (+0.9%) and palladium (+0.1%) were all beneficiaries of the improved risk sentiment, however, with all of the precious metals up on the day.
Looking at the day ahead, 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. Home depot will also be releasing its earnings.
US Event Calendar
- 6am: NFIB Small Business Optimism, est. 106.8, prior 107.2
- 8:30am: Import Price Index MoM, est. 0.0%, prior -0.4%; Import Price Index ex Petroleum MoM, est. 0.05%, prior -0.3%
- 8:30am: Import Price Index YoY, est. 4.45%, prior 4.3%; Export Price Index MoM, est. 0.2%, prior 0.3%
- 11am: New York Fed to Release Q2 2018 Household Debt & Credit Report
DB's Jim Reid concludes the overnight wrap
China's main monthly data releases were all softer than expected, partly weighed down by trade tension and deleveraging efforts. The July retail sales came in at 8.8% yoy (vs. 9.1% expected) while industrial production (6.0% yoy vs. 6.3% expected) and fixed assets investment (5.5% yoy vs. 6% expected) also missed. Notably the Shanghai
Comp. rebounded from session lows post the data but has since declined back to be c0.5% lower. Meanwhile equities in Asia are broadly higher as the Turkish Lira is broadly stable overnight with the Nikkei (+1.80%) and Kospi (+0.51%)
both up while the Hang Seng is down c0.9%. Elsewhere Reuters noted that at the request of the Turkish ambassador, the US National Security adviser John Bolton has met with him to discuss Turkey’s detention of American pastor. As per unnamed US officials, the US has not set a deadline for Mr Brunson’s release but Bloomberg reports that the US have said there is nothing to discuss or negotiate until the pastor is freed.
Indeed the situation in Turkey continues to dominate financial markets. The lira fell another -6.56% yesterday to 6.88 per dollar (now c6.91). Recall that the Turkish currency traded as strong as 3.73 per dollar earlier this year, but is now nursing year-to-date losses of -45.0%. While the depreciation trend continues for the lira, the pace of the move has at least decelerated especially as it was trading north of 7.20 in the Asian session on Monday. The same cannot be said for assets more directly linked to the sovereign. Five-year CDS spreads rose 105 basis points to 565.0, their highest level since November 2008. This may signal growing concern that a currency crisis may morph into a sovereign solvency crisis in the medium term even though it’s the private sector that’s far more indebted.
Yields on domestic Turkish government debt continued to rise as well with 10-year yields hitting a new all-time high of 21.5%. Other emerging market assets were also under pressure, with the MSCI EM index down 1.8%, the Bloomberg EM USD aggregate index OAS up 15 bps to a multi-year high, and several currencies under pressure. The Argentina peso eclipsed its all-time weakest levels versus the dollar, while the South African rand and Colombian peso shed 2.31% and 2.13% respectively. Asian currencies have been more stable, as Chinese policymakers have kept the yuan flat against their trade-weighted basket lately, relieving the pressure on neighbouring countries. In fact general concerns over the weakness in the Yuan a few weeks ago now looks quite parochial after the scale of some of the more recent EM moves.
During yesterday’s trading session, the lira experienced pronounced volatility as news trickled out of Ankara. The central bank promised “to take all necessary measures” to address the crisis, but this did little to impress investors, who are looking for more substantive policy actions. Policymakers basically have three options to support the currency: 1) enact capital controls to prevent investors from selling lira, 2) expend reserves to directly support the lira, or 3) tighten domestic liquidity to make it more expensive to position against the lira and to discourage further outflows. Option 1 would be poorly received by markets, and President Erdogan has insisted that he remains committed to open markets. At the market open yesterday, the lira weakened as much as 12% versus the dollar, but retraced sharply after the central bank announced, around 6:20am London time, the provision of new dollar liquidity to the financial system and thus essentially deploying option 2 discussed above. The currency was soon trading back close to flat and at its strongest point intraday, but subsequently depreciated another 9% as investors digested the announcement. Instead of implementing option 3 from above as well, policymakers did not open their main liquidity window, the 1-week repo auction. This has the effect of pushing the average cost of funds higher via tighter liquidity, but it is unorthodox and a poor substitute for actual rate hikes.
Volatility continued around 13:00 London time, as media outlets (Bloomberg) reported that Turkey was preparing to release American pastor Brunson from house arrest. The lira rallied almost 5% immediately, but retraced sharply after officials denied any such developments. This seesawing price action indicates the fragility of the situation, and also demonstrates how political developments will be key to resolving the situation. If Brunson is released we will likely have a huge relief rally for a period of time. However it's unlikely to solve the full suite of problems the country now faces.
Following on, DB’s EM Chief Economist Kubilay Ozturk has published a timely note looking at the key issues impacting Turkey via a succinct Q&A format. He looks at: i) why the marginal impacts of US sanctions on Turkish assets are so high? ii) how will the Turkish economy be affected from a lower Lira? iii) impacts from the latest initiatives by Turkish authorities and iv) potential scenarios going forward.
Moving on from Turkey, we want to quickly highlight yesterday’s DB HouseView (which I’m now in charge of) one-pager on the ongoing “Trade War” situation. A lot has happened in recent months on this front and a lot more is still pending. While we acknowledge that the topic is well written about, the fluidity of ‘Trade war’ related headlines makes it difficult to follow the status of where we stand with regards to different tariffs measures, retaliations and the numbers behind them. With this in mind, we have put together this one page infographic note highlighting (i) the status of different tariff measures announced so far (ii) the retaliatory push back (iii) room for further escalations (iv) potential macroeconomic impacts and (v) the most recent rhetoric. In this note , we also provide links to various DB research reports by our economists, strategists, and analysts across different regions covering this topic.
Developed market assets followed emerging markets lower during yesterday’s trading. The S&P 500 closed 0.40% lower, with cyclical sectors leading declines. The energy and materials sectors closed -1.20% and -1.04%, respectively, as oil experienced intraday volatility. Brent crude fell as much as 2.48% before retracing to close near flat. Safe haven equity sectors outperformed, with utilities gaining 0.09%. The Dow and Nasdaq indexes shed 0.50% and 0.25% as well.
Treasury yields and the dollar closed flat for the most part, with most emerging market currencies losing value and some safe havens (e.g. the yen and Swiss franc) gaining versus the greenback. The VIX index continued to tick higher, rising 1.62 points to 14.78. We do not expect US financial conditions to be materially affected by the stresses in Turkey and other emerging markets, but it is noteworthy that fed funds futures markets have, over the last two trading days, removed 6 basis points of hikes from the implied end-2019 policy rate.
The dynamic was similar yesterday in Europe. The V2X equity implied volatility index rose 0.83 points to 15.94, while the Euro Stoxx 600 index shed 0.25%. Cyclical sectors underperformed, with financials leading declines. The euro banks index closed at its lowest level since December 2016, as investors anticipated a potential earnings hit to Turkey-exposed institutions. The healthcare industry also lagged, largely due to Bayer’s 10.8% decline after a California court fined Monsanto (recently acquired by Bayer pending regulatory approval) $239 million over damages from a popular weedkiller Glyphosate. Notably around 2-3% of group earnings come from the weedkiller, so the court case may represents a potential headwind for future profitability.
As for data, there were limited releases yesterday in Europe and the US. The final reading for Italy’s July CPI was confirmed at 1.9% yoy. Looking at the day ahead, 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. Home depot will also be releasing its earnings.