The Turkish delight that bites

Yesterday’s Turkish travails are hinting at the pressure emerging markets may face later in the year as the global economy slows. The cost of borrowing Turkish Lira (TRY) for offshore parties rose to over 1000% as the Turkish central bank squeezed TRY sellers to defend the currency ahead of municipal elections this weekend. Aside from wild gyrations in the currency, the overflow also spilled into other emerging markets such as South Africa, Brazil and Mexico. The Mexican central bank rate decision will be closely watched tomorrow night.

If a global slowdown proceeds as the bond market is hinting, emerging markets could be caught in an age-old conundrum. The rotation into defensive developed-market government bonds leads to the selling of their currencies. Logically you would hike rates to support the currency, but if your economy is slowing down, that’s the last thing anyone wants to do. The best hope, of course, is that the slowdown is shallow, but this box canyon of monetary policy is a story we will see much more of as 2019 progresses.

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The rotation into developed-market bonds continued unabated overnight with strong demand in US Treasury auction and the German Bundesbank selling bunds at negative interest rates. Little old New Zealand at the bottom of the world played its part on the global stage as well, with the Reserve Bank of New Zealand (RBNZ) announcing its next move in interest rates would likely be down. Like many other central banks before it this year, the standard mantra was rolled out: the economy is doing well, but we’re nervous about our trade partners globally.

Trade talks between the US and China resume in Beijing today and are taking on ever more importance. An agreement between both parties is the key macro-economic event for H1 2019 and will dictate whether we have a slow and low global pullback or if the day of reckoning arrives much sooner and more aggressively. Any news emerging over the weekend will make for a frisky Wellington session on Monday morning.

Wall Street finally bowed to the bond market overnight with the S&P down 0.45%, the Dow Jones down 0.13% and the Nasdaq down 0.63%. Lyft’s IPO is likely to provide only a temporary respite. The US dollar continues to perform well, especially against emerging market currencies bolstered by bond inflows.

A quiet data day in Asia leads to the US GDP and German CPI this evening, with the slowdown sharks sniffing for blood in the water.

The day wouldn’t be complete without something on this week’s Brexit soap opera. In overnight news Prime Minister May offered to resign in the summer, but only if Parliament votes for her deal this week. The problem is the Speaker of the House has said a new vote is not possible unless the substance of the agreement changes significantly. It hasn’t by the way. After its tantrums earlier in the week, Parliament finally got to vote on its eight alternative Brexit proposals (by the way, no-one asked the Europeans) however it failed to achieve a majority on any of them. The Brexit status quo remains unchanged, while the UK Parliament’s excavation of the foundations of democratic leadership continues unabated.


The US dollar continues to hold its own against the other major currencies as sovereign debt inflows created the equivalent of a nil-all draw on ranges and volatility. The RBNZ’s dovish about-face saw the New Zealand dollar (NZD) collapse by 1.6% to 0.6800 in overnight trading. The Australian dollar was dragged lower, falling by 0.7% to 0.7080 as the currency wolves look for the Reserve Bank of Australia to move to the dove-side next week.

Emerging markets were another story, feeling the heat of the rotation into developed-market sovereign debt. That theme could play out today in Asia as well, with regional currencies possibly on the back foot. Any excessive volatility is likely to be met with central bank “smoothing” action, however.


In the bigger picture, the fall on Wall Street was modest, especially given stocks have enjoyed a positive week so far. Asia-Pacific bourses will likely start the day under pressure, but as the trade talks get underway in Beijing, Asia is probably going to be more circumspect.

Regional markets will be particularly vulnerable to headlines and rumours emerging from the talks: good or bad.


Oil fell overnight as US official inventories rose unexpectedly. Brent crude fell a modest 0.2% to USD 67.85 a barrel with WTI suffering more, dropping 0.9% to USD59.50. The move lower has a corrective look about it rather than a sea change in investor attitudes. Like equities, trading in Asia will be slow as the trade talks get underway.


Gold fell 0.4% to USD1310.00 an ounce as the dollar remained strong and haven flows moved into government bonds instead of precious metals. Gold’s time may well come if global recession worries increase, but for now, investors’ eyes are elsewhere.

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