As Emerging Markets Head One Way, Turkey Lira Goes the Other

(Bloomberg) — The last time Turkey’s lira was so out of step with other emerging-market currencies, Recep Tayyip Erdogan had just come out of prison and was trying to gain a foothold in national politics.

That was 1999. After two decades of the kind of fast-paced growth typical of developing nations, the risks from President Erdogan’s stewardship have set the currency on a divergent path to its peers. Issues including central-bank independence and potential U.S. sanctions are eclipsing global themes such as Federal Reserve policy that dictate the route for other emerging markets.

“Domestic and international factors suggest this divergence between average emerging-market performance and the specific performance of the lira will continue,” said Cristian Maggio, head of emerging markets at TD Securities in London. “Perhaps one of these factors can be overlooked. But when you have many such factors together, lasting for a long time, then it weakens the general understanding of Turkey as a fairly resilient economy.”

The 30-day rolling correlation between the lira and the Currency Index is the most negative in 20 years, according to data compiled by Bloomberg. That’s not all: while the correlation shows the frequency with which the two assets move in the same direction is declining, the magnitude of shared moves is also changing.

The Turkish currency is showing a beta of minus 0.173 with the MSCI gauge this quarter, compared with 1.05 over the past 10 years. That means a one-percent gain in the index results in a slight loss for the lira. In the past decade, both moved in lockstep.

Unique Risk

Stress in the Turkish economy built up between 2016 and 2018 when the central bank was seen as too slow to raise interest rates given a deepening of the current-account deficit. The demand for dollar funding from the government, companies and citizens added to the stress on the lira.

According to Maggio at TD Securities, the proliferation of political tension — from geopolitical skirmishes in the region to a controversial purchase of Russian missiles — sets Turkey apart as a unique risk in emerging markets, justifying the negative correlation.

The concerns driving other developing currencies are more global. The U.S.-China trade war has undermined growth and contributed to persistent strength in the U.S. currency. Central banks are reaching the limits of accommodation as interest-rate cuts prove ineffective in reviving growth.

Another factor that has helped separate the lira from the rest of the EM herd is its recent period of unusual calm.

After the last bouts of turbulence, authorities took steps such as tightening liquidity in offshore money markets to curb the currency’s swings. The result is that the lira has traded in a narrow range since June, despite 1,000 basis points of cuts in the benchmark interest rates, the ouster of a central-bank governor and a military incursion into northern Syria that worsened Turkey’s relationship with the U.S.

The MSCI EM currency gauge has risen 1.3% this year, while the has declined 9%.

(Updates the beta figure in the fifth paragraph)

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Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.

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UK election: Tories confident they can break through Labour’s ‘red wall’

This is one of the key spots to watch for in the election tomorrow

The Financial Times is out with a report suggesting that the Tories are feeling confident in executing their election strategy by breaking down Labour’s ‘red wall’.

The report (may be gated) highlights sentiment on the ground in marginal constituencies in the North East and it details that the resolve of people to vote against Corbyn has hardened going into the election tomorrow.
I talked a bit about the ‘red wall’ in my election primer earlier in the week here. In essence, these are constituencies in the north and the Midlands in which the Tories are looking to “steal” to secure a majority government tomorrow.

I highlighted the seats mentioned in the report above and here’s the breakdown:

UK election2017 general election results in the North East
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Generally, when viewing the ‘red wall’, these are seats that you’d expect Labour to comfortably keep. As such, when they report tomorrow, keep an eye on these places especially the likes of Bishop Auckland, Darlington, and Stockton South i.e. the marginals.

They can go some way in revealing sentiment on the ground in the election this year and if we do see a stronger Tory presence, it could allude to higher odds of a victory for Boris Johnson once this is all said and done.

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Argentina Can’t Pay Debt Until Economy Grows, Fernandez Says

© Reuters.  Argentina Can’t Pay Debt Until Economy Grows, Fernandez Says © Reuters. Argentina Can’t Pay Debt Until Economy Grows, Fernandez Says

(Bloomberg) — Argentina is willing but unable to pay its debts under current conditions and needs the economy to grow again before meeting its obligations, President Alberto Fernandez said in his first speech after being sworn in.

The government will seek “constructive and cooperative” dialogue with the International Monetary Fund and bondholders to address the debt load, Fernandez said, without giving additional details. The outgoing administration of Mauricio Macri left Argentina in “virtual default,” he said.

Fernandez, 60, read off a list of challenging economic indicators that he’s inheriting including the biggest debt load as a percentage of gross domestic product since 2004, when the country was in default and he was cabinet chief. Investors are awaiting details from incoming Economy Minister Martin Guzman on his plans to confront the debt crisis which may include proposals to extend maturities.

“The country is indebted, cloaked by an instability that discards the possibility of development and leaves it hostage to foreign financial markets,” he said. “Argentina should grow with a project of its own and implemented by Argentines, not dictated by foreigners with old recipes that always fail.”

Fernandez’s speech was “constructive,” said said Shamaila Khan, the New York-based director of emerging-market debt at AllianceBernstein. “They obviously didn’t have much policy details. But I don’t think we were expecting that from an inauguration speech.”

Debt Challenge

Macri, who reinserted Argentina into global bond markets after taking office in 2015 but later failed to control inflation and kick start growth, signed a record $ 56 billion IMF credit line last year. The implied probability of non-payment over five years with credit-default trading stands at about 95%.

Macri, who was forced to reimpose capital controls in September after markets sank due to a primary election that showed Fernandez set to win the presidency, had also announced plans to “reprofile” a total of $ 101 billion in debt between payments due to private creditors and the IMF.

Moody’s Investors Service Inc. said restructuring Argentina’s medium- and long-term debt will be a challenge for Fernandez’s administration, and that the future of the nation’s credit ratings will depend on “losses imposed on bondholders as well as the long-term sustainability of the government’s yet-to-be-defined economic program.”

Fernandez said that the 2020 budget can only be drawn up once the debt negotiation has been completed, as well as some economic and social measures haven been implemented to compensate the impact of the crisis in the economy.

“Solving the problem of the unsustainable debt that Argentina has today is not a matter of winning a dispute. The country has the will to pay, but it lacks ability to do it,” Fernandez said.

Argentina’s bonds fell slightly on Tuesday with notes due in 2028 down 0.5 cent to 40 cents on the dollar.

(Updates with quotes from Fernandez, analysts)

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.

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Forex: Dollar Creeps Lower on Cooling Hopes of Delay to Tariffs on China

© Reuters.  © Reuters.

Invesing.com – The U.S. dollar edged lower on Tuesday, as uncertainty over whether the U.S. would delay planned tariffs on imporrts from China continued to weigh on sentiment.

The , which measures the greenback against a trade-weighted basket of six major currencies, fell by 0.17% to 97.48.

Larry Kudlow, President Donald Trump’s top economic advisor, reportedly said he could not confirm the further tariffs on China would be delayed.

That offset positive news on trade amid a Wall Street Journal report suggesting that the U.S. was mulling a delay to imposing tariffs on China.

Without a deal nor a delay to tariffs before the Dec. 15 deadline, the U.S. is slated to impose tariffs on another $ 156 billion on Chinese goods.

These would include cellphones, laptops and tablets made in China, along with toys, office and schools supplies, some clothing, and even frozen Alaskan pollock fillets.

The dollar was also hurt by a rise in both the euro and the pound.

rose 0.22% to $ 1.1086 as economic data, including a in Germany, was not as bad as feared.

With just two days until U.K. voters head to the booths, the continued to rack up gains against the greenback amid expectations that the ruling Conservative party will secure a parliamentary majority.

Firmer also underpinned a bid in sterling.

rose 0.32% to 1.3184.

As a conservative victory is almost fully priced-in, “even a landslide victory might hardly see the pound rise,” said Oliver Allen at Capital Economics.

rose 0.19% to Y108.75 and was flat at C$ 1.3237.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.

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Forex – U.S. Dollar Unmoved Ahead of Fed Meetings, Looming Tariff Deadline

© Reuters.  © Reuters.

Investing.com – The U.S. dollar was unmoved on Tuesday in Asia ahead of central bank meetings and a looming tariff deadline later this week.

The U.S. dollar index that tracks a basket of other currencies was unchanged at 97.610 by 12:30 AM ET (04:30 GMT).

On the radar this week are policy meetings at the U.S. Federal Reserve and the European Central Bank. While the two central banks are not expect to announce any significant changes to their policies, traders will pay attention to clues on whether more easing is in store next year.

On the Sino-U.S. trade front, investors awaited to see whether Washington will go ahead with a planned Dec. 15 tariff hike on Chinese goods.

Bloomberg reported overnight that U.S. Agriculture Secretary Sonny Perdue said Washington is unlikely to impose more tariffs on Chinese exports on Dec. 15.

“We have a deadline coming up on the Dec. 15 for another tranche of tariffs, I do not believe those will be implemented and I think we may see some backing away,” Perdue said, according to Bloomberg.

The EUR/USD pair was near flat at 1.1065, while the GBP/USD pair inched up 0.1% to 1.3151.

The AUD/USD pair and the NZD/USD pair both gained 0.2%.

The USD/JPY pair edged up 0.1% to 108.62.

The USD/CNY pair was little changed at 7.0382, little impacted by data today that showed China’s producer price index was down 1.4% year-on-year, falling for the fifth month in a row. The drop compared with the 1.5% expected decline and the 1.6% fall in October.

Meanwhile, the consumer price index for November jumped 4.5% year-on-year, as food prices skyrocketed 19.1% amid an outbreak of African swine fever.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.

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China’s Global Times warns of downtrend in US-China trade – difficult to reverse

China’s Global Times warns of downtrend in US-China trade – difficult to reverse

The Global Times is forthright with its views, a good window into China sentiment 

Latest piece:

  • It has been 18 months since the US began imposing 25 percent tariffs on the first tranche of Chinese goods, and bilateral trade between the world’s two largest economies is still sliding. 
  • Even with a “phase one” trade deal, the downtrend in bilateral trade will be difficult to reverse. 
  • Meanwhile, China’s total trade actually expanded 2.4 percent year-on-year in the first 11 months, indicating that trade with the US is not irreplaceable for China. 

Bolding mine.

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Pound Rally Passes Euro Milestone as Polls Back Conservatives

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The pound strengthened Monday to a fresh two-and-a-half year high against the , as weekend opinion polls continued to point to a win for the ruling Conservatives in this week’s general election.

The currency also rose against the after polls in Britain’s Sunday newspapers all putting Boris Johnson’s party in the lead. Though the gap between the parties has narrowed throughout the campaign, it is not enough to keep the Conservatives from returning to power this week. The weekend surveys spurred buying by European investors, according to traders.

“The pound is rallying again after markets all but fully discount a good Tory majority,” wrote Elsa Lignos, global head of currency strategy at Royal Bank of Canada, in a research note. “Friday will show whether that was a good strategy or not.”

As well as gaining 0.3% to 83.93 pence per euro, it also added as much as 0.3% against the dollar to $ 1.3181 Monday. The pound has strengthened 3% against the U.S. currency over the past month, as investors grow increasingly confident of a win for Johnson in the December vote. Still, the cost of hedging against a fall in the pound has also surged as the election looms, showing lingering caution following the failure of most opinion polls to accurately predict prior votes such as the 2016 Brexit referendum.

The spot rate for the pound-dollar pair continues to diverge with options, as two-week risk reversals show increased demand to hedge an unexpected outcome from Thursday’s voting. A Bloomberg survey last month found the pound would fall to $ 1.27 on a Labour-led coalition outcome, a more than 3% drop from current levels.

Positioning on the currency also remains mixed, with leveraged funds slashing short positions to the lowest since May while asset managers have turned more bearish on the currency, according to the latest data from the Commodity Futures Trading Commission.

“The scope for surprise at this week’s general election is sizeable,” wrote Goldman Sachs (NYSE:) strategists including Alain Durre in a research note. “The share of voters that are still undecided- so late in the campaign- means that even a small swing in that slice of the electorate would lead to a hung parliament.”

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.

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Goldman Sachs sees 10-year Treasury yields rising to 2% on “Phase One” trade deal

Says that there is little scope for the FOMC meeting this week to be a catalyst for movement in the rates market

USGG10YR

The firm’s chief interest rate strategist, Praveen Korapathy, argued that 10-year Treasury yields will probably climb towards 2% if the US and China reach a “Phase One” trade deal but further upside beyond that will probably be limited.

Adding that while risks ahead are substantial, their base case remains for a trade agreement that includes a reduction in existing tariffs and avoids those due to take effect on 15 Dec.

With regards to other events this week, the firm notes that the FOMC meeting should not produce any surprises so it is unlikely to cause a stir in markets.

Just to note, Goldman Sachs’ view for Treasuries next year is that they will end 2020 at around 2.25% “on account of the improved economic outlook and the removal of some tail risks i.e. trade war, Brexit”.

As for the “Phase One” deal, I reckon there could be an initial hint of optimism but as soon as markets get a grip of the fact that the deal isn’t a major game changer in US-China trade relations, the ‘sell the fact’ trade may be more profound in my view.

But we’ll see. First, we need the deal to materialise. Right now, it’s still a matter of “if”.
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WSJ report on deal nearing for a modified US, Canada, Mexico trade agreement

Wall Street Journal on edging closer to a new NAFTA, USMCA trade deal. Citing people familiar with the negotiations:

  • House Democrats and U.S. Trade Representative Robert Lighthizer are nearing a deal for Congress to pass a modified U.S. trade agreement with Canada and Mexico
  • though hurdles remain
  • have narrowed differences over key sticking points in recent days
  • biggest divide is over revising the agreement on the enforcement of labor rules
  • (ps, posted on this earlier, here: NAFTA – Mexican Foreign Minister says will not accept US labor inspections in USMCA)

If USMCA took this long, how long with a phase one agreement with China take? 

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