Lira Plunge Brings Back Sense of Gloom as Emerging Markets Drift

(Bloomberg) -- Turkey’s lira ended a three-day rally and slid as much as 8 percent, underscoring the fragility of emerging-market sentiment. Gauges of stocks and currencies headed for a third week of declines amid growing risks from the U.S.-China trade war, Turkey’s policy response and volatile commodity prices.

Emerging-market equities held just above a bear-market threshold and exchange rates hovered near a 13-month low as investors question whether policy makers were doing enough to ring-fence their economies from the impact of higher U.S. interest rates and the end of ultra-cheap capital. Those looking to buy the dips were deterred by the bearish momentum, that spread to even better-placed markets such as India and Indonesia.

Lira Plunge Brings Back Sense of Gloom as Emerging Markets Drift

The MSCI Emerging Markets Index of stocks rose for the first time in eight days, still on course for the biggest weekly loss in six months. Its currency counterpart slipped 0.1 percent, with the focal point of the sell-off shifting to South Africa’s rand. Bond-risk premiums jumped for a third week.

Riskier assets got a reprieve Friday from increased bets that China and the U.S. will make progress in restarting trade negotiations. President Donald Trump prodded China to offer more at the bargaining table as the two countries prepared for their first major negotiation in more than two months in an effort to head off an all-out tariff war.

HIGHLIGHTS

  • MSCI equities gauge gained 0.1% Friday, set for 3.8% retreat for the week
  • Traded below 100-week moving average for first time since January 2017
  • EM currencies index dropped 0.2%, for a weekly decline of 0.9%
  • Risk premium on USD sovereign bonds up 2bps to 366: JPMorgan indexes

EMEA

  • TURKEY
    • Lira resumed its retreat hours before S&P Global Ratings was set to announce its grading decision on the junk-rated country’s foreign-currency debt
    • Currency down 5.1% to 6.1505/USD after rallying 18% in previous 3 days
    • Treasury and Finance Ministry said banks would ease access to credit; statement came after U.S. threatened more sanctions if Turkey didn’t free American pastor Andrew Brunson
    • Borsa Istanbul 100 Index slid to lowest level since January 2017
    • Read: It’s Erdogan Versus the Ratings Companies Again: Mark Gilbert
  • SOUTH AFRICA
    • Rand briefly weakened past 15/USD as the spillover effect from Turkey clouded outlook for economies with deep current-account deficits
    • Yield on benchmark rand-denominated 2026 government bonds rose 11bps to 9.09%, highest on closing basis since June 19
  • RUSSIA
    • Ruble fell 0.8% to 67.41 per dollar, erasing yesterday’s gain
    • Two Decades On, Russia Offers Currency War Insights: Macro View

ASIA

  • CHINA
    • PBOC strengthened yuan fixing by 0.08% to 6.8894 per dollar, stronger than average estimate
    • China seen strengthening the yuan as trade talks with the U.S. loom
  • SOUTH KOREA
    • Won had 1st weekly advance in 3 weeks
    • “The climb higher in USD/KRW has slowed in recent weeks and seems to have lost some of its correlation to the CNY move,” says Eddie Cheung, Asia FX strategist at Standard Chartered Bank in Hong Kong; weak recent CPI, exports and employment data were supportive of the BOK postponing its August hike, he said
  • THAILAND
    • Baht ended week on a rising note as bond inflows increased
    • Bank of Thailand may raise its policy rate this year as there are clear benefits from normalizing policy sooner rather than later, said Standard Chartered Bangkok-based economist Tim Leelahaphan
  • MALAYSIA
    • Ringgit dropped for 9th week, the longest losing streak in almost 3 years
    • GDP rose 4.5% y/y in 2Q vs est. +5.2% and +5.4% in 1Q

LATAM

  • MEXICO
    • Peso 0.8% lower at 19.1311 per dollar
    • World’s best-performing major currency has more scope for gains, Wells Fargo said
  • BRAZIL
    • Real weakened for a 9th day in 10
    • Dropped 0.8% to 3.9367/USD

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