Lira looms over EMs with Turkey white-knuckle ride

DUBAIThere isn’t a story across emerging markets (EMs) this week likely to grip traders quite like the nosedive in Turkey’s lira.

As the nation heads for a full-blown financial crisis, concern that its troubles will sour sentiment toward other developing nations is growing, sending a gauge of implied volatility for currencies up by the most since China devalued the yuan in 2015.

An index tracking EM currencies renewed a 2018 low yesterday after dropping the most in more than a year last Friday.

The lira’s collapse and its impact on the nation’s banking industry adds to a list of worries that has kept appetite for risk relatively low this year.

“This is another headwind facing EMs that has arisen in the past few months,” William Jackson, chief EM economist for Capital Economics in London, said in a note.

“China’s economy is now slowing, EMs are now tightening monetary policy and the trade war is escalating. This could worsen investor sentiment towards EMs and also strengthens our view that EM growth will weaken.”

Most analysts note that even though Turkey is impacting sentiment toward EMs, the spillover is likely to be temporary. The financial crisis dragging the lira down is specific to Turkey, according to Capital Economics and Credit Agricole SA.

“The other risky channel could be increased investor concerns for other countries, which are running a high deficit and are faced with political issues,” Guillaume Tresca, senior EM strategist at Credit Agricole in Paris, said in an emailed note.

“That said, in our view, the Turkish situation is quite peculiar.”

Much of Turkey’s trade is linked with the European Union, where lenders with exposure to the local bank

ing industry led the decline in the MSCI Europe Banks Index last Friday. Elsewhere across EMs, China will release industrial production, retail sales and fixed-asset investment data, Indonesia’s central bank will review policy tomorrow and former Argentinian President Cristina Fernandez de Kirchner faces a corruption trial.

And while the Russian ruble’s woes may not be over, there are no concrete signs the US will announce restrictions this week.

The currency extended its slide yesterday in Asian hours after sinking 21% last week, the most since 2001.

“This is a textbook currency crisis that’s morphing into a debt and liquidity crisis due to policy mistakes,” said Win Thin, a strategist at Brown Brothers Harriman & Co in New York.

“The way things are going, markets need to be prepared for a hard landing in the economy, corporate defaults on foreign currency debt, and possible bank failures.”

The nation will also release unemployment data for May and industrial production for June.

There’s Always China

China’s economy has proven relatively resilient to the trade war so far. Industrial production, retail sales and fixed-asset investment data for July due today will provide more clues on how it’s holding up.

Factory output growth is forecast to accelerate to 6.3% year-on-year (YoY), from 6% in June, while retail sales are also projected to expand at a faster pace. That may help the yuan to recovery. The onshore currency has been relatively stable in August after dropping for four straight months.

Brazil’s political season is also heating up, and with it the potential answer tomorrow to a question that has dogged investors for months: Can former President Luiz Inacio

Lula da Silva actually run for the top job in October — even though he’s serving a 12-year prison sentence for corruption? Some observers worry that even if Lula isn’t allowed to stand for election, his support for another candidate could upend Brazilian assets.

The real has already fallen almost 15% this year, among the worst-performing currencies, after a trucker strike weighed on retail sales and consumer confidence. US Defence Secretary James Mattis met Brazilian officials to discuss military cooperation between the two nations, as well as Venezuela’s deepening crisis.

Indonesia’s central bank reviews policy tomorrow and could be emboldened to hike again after data showed the economy expanded last quarter at the fastest pace since 2013.

Some 100 basis points of rate hikes by Bank Indonesia over May and June have been credited with helping contain losses in the rupiah, which has fallen about 6% against the dollar this year. President Joko Widodo’s selection of an Islamic cleric as his running mate for elections next year was seen as boosting his chances of re-election and may aid Indonesian assets this week.

Meanwhile, Egypt will decide on monetary policy on Thursday. The central bank has kept its benchmark rate unchanged at 16.75% since the end of March.

Another former president, Argentina’s Cristina Fernandez de Kirchner, faces her own corruption trial. So far, the probe has been less of a blessing for markets than expected, slowing investment as uncertainty mounts.

The yield on Argentina’s century bonds rose to a record last week and the peso tumbled. International Monetary Fund officials began a nine-day trip to Buenos Aires yesterday to review Argentina’s progress under the terms of a US$50 billion (RM205 billion) credit line with the fund. That agreement provided a bulwark for markets and is seen as a possible lifeline for the struggling economy.

On another note, India released Consumer Price Index data for July yesterday, followed by Wholesale Price Index data today. Consumerprice gains are forecast to slow to 4.49% YoY from 5% in June.

Indonesia reports trade data for July tomorrow, with the balance projected to swing to a deficit from a surplus in June.

Poland will publish final July inflation data together with gross domestic product today, with tomorrow off for a public holiday.

The Philippines releases data on remittances from overseas workers for June tomorrow.

Malaysia reports second-quarter GDP figures on Thursday and will release current-account data the same day. — Bloomberg