In yet another round of disappointment, the Turkish Lira and the Turkish market look set for further falls. With a Government desperate to politicise events and unwilling to recognise what needs to be done to stabilise the economy, Turkish leadership has been found wanting.
For other emerging markets, some markets have escaped rather painlessly whilst others such as Argentina are vulnerable to being drawn into the mire. Emerging market equities have tumbled and whilst they look cheap a few days ago, after a 30% over the past two years, they have cheapened significantly.
Markets rebounded over the day as fear of contagion from the ailing Turkish markets seems to have been contained. The Turkish lira has lost some 40% to the dollar this year. In the afternoon session in New York, bonds began to retrace after an initial rally.
Risk was being taken off, well a little bit was. Short covering dominated the early London session for treasuries. Once $14 bio of 3 new issues were announced, the long duration issues were rate locked by paying in the swaps. The deal tied flows were negated by the back up in treasury yields and rate receiving by traders.
With most eyes starting to drift away from Turkey, the U.S. equity markets gained attention. Financial stocks bore the brunt of the sell-off. The major banks falling between 0.8% and JPM falling 2.2% on the day. The Vix rose to 14.78 and is the highest it has been over a month or two. Harley Davidson fell 4.3% after Trump tweeted support of a boycott for the company.
The CBO (Congressional Budget Office) appears to be at odds with the Trump administration’s economic projections again. The office believes the economy will grow at 3.1% for 2018. However, it is very pessimistic about growth rates going forward. It is expecting a growth rate of 2.4% in 2019. And that number is before factoring in any further tariffs.
For the period 2023 to 2028, the CBO has a projected growth rate of 1.7% – well below the Mnuchin figure of 4% and the 3% required to balance the budget. The long term outlook for bond holders in the U.S. looks likely to see higher rates in the future.
The good news, however, is that China’s economy is growing once again. After stalling earlier in the year and with the PBOC pump priming the market, credit has flowed and the economy has started to gain momentum.
Equities: The S&P fell 0.7%, the Dow fell 0.5% and the Stoxx 600 fell 0.3% while Vix closed 14.78.
Currencies: The Bloomberg Dollar Index rose 0.2% and the euro fell 0.1%. The Turkish lira slipped 7.8%, the weakest on record.
Bonds: The ten-year closed around at 2.877%. The 2-year closed at 2.61% and the 30-year closed at 3.045%. The ten-year bund closed at 0.318% and the UK gilt closed at 1.26% and the OAT closed at 0.686%.
The U.S. curve closed the day with the following closes 2/10 at 26.3 bp, 2/30 at 43.1 bp and the 10/30 closed at 16.7 bp. The U.S. 5-year closed at 2.746%.
Commodities: WTI rose fell 0.4%, gold fell 1.4%. and silver fell 2%. The Bloomberg Commodity Index also fell 0.8%.
Bitcoin is trading around $6267.
Aussie Market Today.
Equity markets look likely for a rebound if the Asian session can hold. The bonds will be directed by flows and also if the equity market can rally. Otherwise, the bonds should rally due to risk being taken off.
The Aussie dollar looks to be under pressure. However, the relief valve remains in the form of bond rates.
Geopolitical risks remain high.