Outlook for global markets seen trekking lira turmoil
Investors are also turning cautious in holding Turkish assets
Arelentless fall in Turkish lira is expected to have continued impact on other markets globally, which were already facing an escalating trade war.
The Turkish lira fell as much as 18 per cent at one point on Friday, the biggest since Turkey’s financial crisis of 2001, before closing 15.88 per cent lower to 6.4323 against the dollar after US president Donald Trump announced that he was doubling metals tariffs on Turkey.
The currency has shed nearly 70 per cent of its value since the start of the year.
“As the crisis evolves, events in Turkey will have a shortterm impact on assets outside the country,” said Mark Haefele, global chief investment officer at UBS.
Turkey 10-year bond yields rose 8.4 per cent on Friday to 84. The 5-year Credit Default Swaps — the price to hedge against a default on Turkish debt — jumped to 453 basis points from 378 basis points on Thursday. The CDS was at 323 basis points at the start of the month. Investors are also turning cautious in holding Turkish assets.
“Amid irrational monetary policy decisions and political uncertainties, investors are continuing to lower their exposure to Turkish assets at this time,” Emirates Investment Bank said in a note.
The fall in Turkish assets caused panic in other world markets.
Some of Wall Street’s biggest banks are warning investors to steer clear of Russian assets after the ruble’s worst week since the 2015 oil crash amid mounting risks of crippling sanctions from the US.
Morgan Stanley turned bearish and UBS Group AG closed its recommendation to buy the Russian currency, with analysts at both banks saying in notes published on Thursday that the risks outweigh the reward for owning the rouble. Diana Amoa, a money manager at JPMorgan Asset Management, puts the likelihood of curbs on Russian sovereign debt at as high as 50 per cent.
The rouble retreated more than 6 per cent this week as contagion from the crisis in Turkey compounded tensions with the US. A fresh batch of sanctions introduced this week added to mounting concerns that the US is about to start ratcheting up the severity of its restrictions against Russia. The worst-case scenario is a bill introduced in Washington last week that seeks penalties on banking transactions and new Russian sovereign debt as punishment for meddling in the 2016 presidential elections.
“Geopolitics is what keeps us all up,” Amoa said in an interview with Bloomberg Television on Friday.
“We’ve seen a lot of sanctions coming through ahead of the mid-term elections. I think there is an incentive to send a strong message that the US will not allow interference in their democratic processes.”
Amoa said she has reduced holdings of Russian assets because the tail risk from potential sanctions is “just too large.” High foreign ownership of Russian sovereign debt means that sanctions would have a big impact on bond yields, she said. Foreigners held about 28 per cent of the nation’s outstanding rouble debt as of July 1, according to central bank data.
Uncertain outlook
Both Republicans and Democrats in Congress have called for tough measures against Russia in the wake of last month’s summit between President Donald Trump and his counterpart Vladimir Putin. Still, the outlook for passage of the bill submitted last week remains uncertain, particularly since the US Treasury warned that sanctioning sovereign debt could cause instability in global markets.
The US is more likely to apply sanctions selectively to avoid “collateral damage” than to pass the bill in full, according to Tilmann Kolb, an analyst at UBS. Pressure on Russia, however, is only likely to rise further in the near term, he said in a note.
No decision can be taken on the bill until the House returns from summer recess next month, leaving a cloud of uncertainty over markets until then.
Analysts at Morgan Stanley said that could leave the Russian Finance Ministry struggling to find enough buyers for the equivalent of $3 billion (Dh11.02 billion) it can still borrow this year, of which $800 million would be swapped for sovereign bonds that are outstanding.
“The rouble remains highly sensitive to potential new legislation from the US,” Morgan Stanley analysts including Hans Redeker said in a research note. “We think that political risk will weigh on sentiment and increase the rouble risk premium as we head into September.”
The Russian currency retreated more than 6 per cent this week as contagion from the crisis in Turkey compounded tensions with the United States.