The Market Today

TODAY’S CALENDAR

Quiet Day, Unless You’re in Ankara:  There are no economic reports on the calendar today.  Markets are fully focused on the turmoil in Turkey.  Already, the Turkish Lira is below 7.0 versus the Dollar, a level analysts in the region say is untenable.  The Turkish 3-year bond yield has risen over the last two days from 20.9% to 24.0%.  Turkey’s 5-year CDS is now trading above Greece’s.  At the heart of the issue appears to be a continued tightening of power by Erdogan who, as discussed last week, has directed the central bank not to raise rates despite an 18-month run of double-digit inflation.  The Turkish banking system has far more foreign-denominated liabilities than assets which only exacerbates the collapsing currency.  Looking at foreign exposure to the Turkish banking system, Spain and France have the most to lose.  This will continue to be the focus for investors today and, perhaps, for the remainder of the week.

 

TRADING ACTIVITY

Overnight – Turkey Keeps Markets on Edge: Last Friday’s concerns about the economic situation in Turkey, and the risk it could spread to other emerging markets, has outlasted investors’ two-day weekend break. Global equities have added to Friday’s losses and core sovereign debts have remained firm as the Turkish Lira has declined to a new all-time low against the Dollar. Over the last two days, the Lira has plunged roughly 25% as its ongoing economic woes have become the major story in market publications. In attempt to bring some order to the chaos over the weekend, the Turkish central bank lowered banking reserve requirements to free up liquidity and limited how much foreign currency swap exposure financial institutions could take on. But those efforts have so far been drowned out by several speeches from the country’s president. President Erdogan warned the U.S. “You cannot tame our people with threats,” and added “the dollar, euro, gold …are the bullets, cannon balls, missiles of the war started against us.” Several major Asian exchanges saw declines of greater than 2% and the Stoxx Europe 600 was down 0.5%. Peripheral Europe was being punished more severely given the contagion concerns, with indexes in Italy and Spain off more than 1%. Sovereign yields for those two countries were also notably higher, with the respective 10-year yield up more than 10-bps. The safer 10-year German yield was down 0.5 bp while the 10-year Treasury yield had dipped nearly 3 bps.

 

NOTEWORTHY NEWS

ICYMI – August 10, 2018 Weekly Market Recap: The U.S. economic calendar was quiet last week, a theme shared by markets until geopolitics shook things up in Friday’s global session. There were two key U.S. reports that were tied to the Fed’s mandate. First, the June JOLTS report reinforced the fact that the labor market remains strong. An unexpected uptick pushed the number of open job postings (6.662MM) to its second highest level in records back to 2000. In context of the labor supply, there was fewer than a full unemployed person (6.56MM) available to fill each job opening. Second, CPI inflation remained well above the Fed’s target at 2.9% YoY and the core measure moved up to 2.4%, its highest since 2008. Base effects remain responsible for the above-target readings which should moderate through the remainder of the year. On a monthly basis, the 0.24% increase for core prices was the fastest since January amid firmer rents and weaker medical care prices. Elsewhere in the report, autos and airfares were stronger while apparel remained week. Between those two reports, two Fed officials (Barkin and Evans) showed support for at least one more rate increase this year, and possibly two. Still, markets steadied until turmoil in Turkey cracked global sentiment. The Turkish Lira sank to an all-time low as investors feared threatened U.S. sanctions could push the Turkish economy over the financial cliff it’s been climbing for some time now. Click here to read about those events and more.

 

Bloomberg Survey of Economists – Stronger Growth Again: The August 2018 Bloomberg Survey of Economists reflected firmer growth for the U.S. economy than in July but implied there would be little if any effect on inflation, the labor market, and as a result interest rates.  The overall pace for economic growth was revised up across the next six quarters when compared with projections from July. However, the downward trend from a 3Q18 peak of 3.0% QoQ, SAAR remained intact. For the full year, economists still expected growth of 2.9% despite the upward revisions.