A Turkish national flag hangs above retail kiosks on a street in Ankara, Turkey. (Source: Stringer/Bloomberg)

Turkey's Collapse Sinks Emerging Markets on ‘Manic Monday’

(Bloomberg) -- Turkey’s meltdown rippled across emerging markets, sending stocks and currencies to their lowest levels in at least a year.

The lira led losses among global peers after the nation’s first steps to bolster the financial system were seen by some analysts as insufficient to protect markets. As President Recep Tayyip Erdogan lashed out at the U.S., took higher rates off the table and said he wouldn’t accept an international bailout, traders pushed down Turkish assets in a selloff that spilled over to other developing countries. The rand’s one-month implied volatility soared by the most since December 2015, while the Argentine peso touched 30 per dollar.

"It’s another Manic Monday," said Jordan Rochester, a currency strategist at Nomura International in London. "We go through the list of options they have to stop this: it involves rate hikes, getting the IMF involved and restoring market confidence in the lira. Unfortunately, all the components are going the other way."

Turkey's Collapse Sinks Emerging Markets on ‘Manic Monday’

Fear that the Turkish meltdown will keep punishing emerging markets resurfaced Monday as traders also grappled with tensions between the U.S. and major economies such as Russia and China. Still, many analysts say there are few fundamental reasons to add the whole developing world to the same basket as several countries have done their homework. That means: while the stress in Turkey may continue, its correlation to the rest of the asset class may decline soon.

“EM has already seen a large selloff between April to July and negative developments in Turkey will eventually be seen (along with Argentina) as isolated given their exceptional external imbalances compared to most EM countries,” JPMorgan analysts including Luis Oganes and Jonny Goulden wrote in note to clients.

In fact, Argentina took emergency steps to stabilize its currency in the wake of an emerging-market rout caused by Turkey’s crisis, jacking up its already highest-in-the-world interest rate by 5 percentage points and outlining a plan to eliminate short-term notes.

Regardless of what happens to emerging-market currencies from here, most central banks aren’t likely to respond to the recent bout of weakness as inflation is low in most cases, according to Edward Glossop at Capital Economics in London.

“There are a handful of central banks that are more jittery – Mexico, South Africa and Indonesia,” the economist wrote. “If we are right in thinking that currencies will stabilise over the next few weeks, policymakers in Mexico and South Africa should refrain from raising interest rates at their upcoming meetings. Indonesia is the exception. With its next meeting scheduled for Wednesday, there is little time for the recent bout of turmoil to subside.”

Turkey’s market turmoil didn’t just erase a July rebound in emerging-market stocks -- it also made them the cheapest since early 2016, before a two-year, 60 percent rally. At 10.8, the MSCI Emerging Markets Index’s 12-month blended forward price-to-estimated earnings ratio is now also below where it was after a sell-off in the second quarter.

Turkey's Collapse Sinks Emerging Markets on ‘Manic Monday’

While some analysts say they are happy to nibble at stocks, they aren’t really diving in. Equities in developing markets will likely remain turbulent with little sign of stability to lure bargain hunters despite Monday’s selloff, according to UBS Asset Management.

“We see building value, but you have no visibility on when that value can be realized,” said Geoffrey Wong, head of global emerging markets and Asia Pacific equities at UBS Asset in Singapore. Investors can be forgiven for feeling wary, “given that we’ve got a 1-2-3-4-5-6 punch, not just a 1-2 punch.”

Highlights:
  • MSCI Emerging Markets Index sank 1.8 percent to 1,043.30
  • CBOE Emerging Markets ETF Volatility Index rose to a one-month high
  • MSCI EM Currency Index posts biggest four-day slide since Nov. 2016
  • Risk premium on EM sovereigns +2bps to 365bps: JPMorgan indexes

Here’s what other analysts and investors are saying:

  • Nigel Rendell, analyst at Medley Global Advisors LLC in London:
    • "There is some knock on impact through association, by being merely EM, but Turkey has some very unique problems. It’s hard to find another EM with such deep-rooted issues that policymakers are refusing to counteract with conventional monetary policy."
    • "There has been some panic offloading of positions in some of these other markets, which could provide cheap re-entry points."
  • Paul McNamara, a London-based fund manager at GAM UK Ltd., said in a Bloomberg Television interview:
    • “It can be contained to just Turkey because there aren’t really any other emerging markets that have exactly the same toxic blend that Turkey has."
    • “Only Argentina really has the external deficit, and they don’t have as much domestic debt.”
  • Jan Dehn, head of research at Ashmore Group Plc in London:
    • “While the plunge in Turkish assets has led to cries of contagion, the ensuing volatility is "replete with opportunity."
    • This contagion "has not happened in EM for twenty years, nor, in our opinion, will it ever re-appear."
    • EM fundamentals much more resilient to external headwinds today.
    • Recommends buying weakness in non-Turkey EM assets.
  • Esther Reichelt, strategist at Commerzbank AG in Frankfurt:
    • On potential downside for EM currencies: "It depends on whether the central banks are likely to show a clear sign that they are going to take stabilizing measures. That’s very likely for Russia and the rand, less likely for the Indian rupee."
    • "The dollar is up due to safe haven demand. Right now, it seems like the main stress has calmed down and it doesn’t seem like there is contagion in EM currencies, which would also imply that the risk-off sentiment is going to fade."

Upcoming Tuesday:

  • China July industrial production, retail sales
  • Colombia retail sales
  • China jobless rate, retail sales, industrial production, fixed assets
  • Namibia rate decision
  • Poland GDP
  • Ukraine GDP
  • Romania GDP
  • Slovakia GDP
  • Czech GDP
  • Hungary GDP
  • For a list of the day’s biggest earnings releases, click here.

Latin America:

  • ARGENTINA:
    • Merval Index dipped 3 percent to 26,061.96
    • Peso declined 2.3 percent to 29.93 per dollar
    • Argentina Hikes World’s Highest Rate Again Amid Turkey Contagion
    • Surprise Argentine Rate Hike Has Analysts Mostly Applauding
    • Think Turkey, Argentine Sovereign Debt Is Bad? Look at Companies
  • BRAZIL:
    • Ibovespa increased 1.3 percent to 77,496.45
    • Real declined 0.5 percent to 3.88 per dollar
    • 10-year local-bond yield fell two basis points to 11.85 percent
    • FinMin Said to See No Need to Intervene in Market For Now
    • Brazilian Economists Cut 2018 GDP Forecast to 1.49%
    • Failure to Carry Out Reform Could Halve Growth Rate: DB
  • MEXICO:
    • Mexbol index increased 0.8 percent to 48,767.02
    • Peso slid 1.1 percent to 19.1203 per dollar
    • 10-year local-bond yield rose six basis points to 7.814 percent
    • Mexico New Govt Won’t Inherit Crisis, FinMin Says to Universal
    • Trump Says Mexico Trade Talks Going Well and ‘Canada Must Wait’
    • BofAML Favors Mexico Stocks in Latin America on Growth Bet
  • Click for market news on ANDES

EMEA:

  • TURKEY:
    • Borsa Istanbul 100 Index fell 2.4 percent to 92,684.55
    • Lira lost more than 6.5 percent to 6.88 per dollar
    • Turkey Takes First Steps to Bolster Banks Amid Lira Decline
    • Republic of Turkey Is Said to Hold August 16 Investor Call
    • Trump Adviser Bolton Met With Turkey’s Ambassador to U.S.
    • Turkey Default Wagers Soar to Highest Since 2008 Crisis: Chart
    • Turkey ETF Sees Cash Inflows Surge as Short Sellers Smell Blood
  • RUSSIA:
    • MOEX Russia Index increased 0.5 percent to 2,285.61
    • Ruble declined 0.1 percent to 67.8 per dollar
    • 10-year local-bond yield gained 13 basis points to 8.43 percent
    • First Deputy Prime Minister Anton Siluanov said nation will further trim its holdings of U.S. securities and reduce reliance on the dollar amid sanctions threat
    • Wall Street Sweating Sanctions Says Ruble’s Crash Not Enough
  • SOUTH AFRICA
    • FTSE/JSE Africa All Share Index increased 0.3 percent to 57,885.26
    • Rand declined 2.3 percent to 14.4194 per dollar
    • 9-year local-bond yield gained 17 basis points to 9.032 percent
    • Central bank said currency move won’t prompt intervention
    • Standing Pat, Central Bank Says Rand Drop Is Blip Due to Turkey
  • Click for market news on SOUTH AFRICA, POLAND and HUNGARY

Asia:

  • CHINA:
    • Shanghai Composite Index dipped 0.3 percent to 2,785.87
    • Offshore yuan lost 0.4 percent to 6.8990 per dollar
    • 10-year local-bond yield gained four basis points to 3.595 percent
    • China’s Slower Credit Growth Underscores Worries Over Economy
    • Commercial banks cut corporate bond holdings by most in 17 months
    • Even as Yuan Slides, China Stocks Resist Emerging Market Selloff
  • INDIA:
    • Sensex Index fell 0.6 percent to 37,644.90
    • Rupee dipped 1.6 percent to 69.934 per dollar
    • 10-year local-bond yield rose seven basis points to 7.8233 percent
    • Inflation eased for the first time in four months
    • Turkey Turmoil Complicates Inflation-Targeting RBI’s Job on Rate
    • Click for more on markets in ASIA

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