A sense of concern over Turkey has crept into the banking sector of Europe. The Stoxx 600 Europe Banking Index fell 2.0% through Friday to a three-week low.
The Spanish bank BBVA fell 5.2%, Italy’s UniCredit declined 5.6% and from France, BNP Paribas fell 3.0%. The declines accelerated as the ECB expressed concerns about the European banking sectors exposure to Turkey.
BBVA owns almost 50% of Turkey’s Garanti Bank and UniCredit has a 40.9% stake in Yapi Kredi whilst BNP Paribas holds 72.5% in the retail bank TEB.
It was not only Europe that suffered as the S&P 500 Financials were off by 1.0%. Wall Street slumped on Friday as geopolitical tensions between the U.S. and Turkey sent jitters across global markets. President Donald Trump announced on Friday that he would double tariffs on steel and aluminum imports from Turkey, as the two countries face a diplomatic conflict.
Selling in the Turkish Lira has ricocheted into the country’s bond market, sending the yield on the local currency 10-year bond back above 20%.
Just after trading opened in Istanbul, the benchmark 10-year yield shot up 84 bps to 20.58% (Source: Bloomberg). It marked an all-time peak for that type of issuance and brought it above the high it reached on Tuesday.
Dollar denominated debt, which has been steadier since it is not directly vulnerable to the slide in the Lira, was also under pressure. The yield on the 10-year paper maturing in October 2029 jumped 24.7bps to 7.92%, according to Bloomberg data. Another 10-year bond maturing in February 2028 faced a 26 bps rise in yield to 7.84%.
Another barometer of risk is the price to hedge against a default on Turkish debt by using instruments called credit default swaps (CDS). This rose to its highest level since 2009 when it printed 400 bps, according to Bloomberg data.
The flight to safety trade saw money flow into US Treasuries as the T10 traded higher to 2.873% despite the Consumer Price Index (CPI) increasing to 251.29 Index Points in July from 250.86 Index Points in June of 2018.
The Euro fell on fears over Turkey with EURUSD slipping to 1.1411. The 1.1400 level has not been seen since July 2017. There was also a further round of weakness for GBPUSD to 1.2771, a level not seen since June last year so providing a lift to the Dollar Index to 96.19 last seen on June 26th, 2017.
Earlier in the day Turkish President Tayyip Erdogan urged citizens to sell U.S. Dollars and gold for lira, after a meeting between Turkish and U.S. officials lead to no solution over the detention of a U.S. pastor in Turkey.
The Turkish lira slumped to an all-time low. During Friday the USDTRY rate slipped from 5.5848 to 6.4032 i.e. the TRY fell 14.65%.
Metals prices were mostly lower Friday as a plunging Euro pushed the Dollar Index above a year high, so shaking investor sentiment on Dollar-dominated commodities. However, gold steadied on safe-haven demand.
Gold futures for August delivery on the Comex division of the New York Mercantile Exchange fell by $0.90, or 0.07%, to $1,219.00 a troy ounce, but remained above an intraday low of $1,213.20.
Copper fell 0.81% to $2.74, while Zinc prices fell 2.52% at 2,540.25. Aluminium prices rose 0.87% to 2,092.50, while Nickel futures fell 0.41% to 13,812.50.
The WTI Crude Oil market found late strength after initially trying to rally. It certainly ran into pressure at the $70 level, and then breaking below the $67 level for a brief moment. Friday was bullish and suggests the market will find support here. If that persists this week it may well draw buyers back into the market.
The problem for oil, as with all other commodities is the strength of the U.S. Dollar. Beyond that, there are no current pressing geopolitical concerns out there to drive oil higher.
The week ahead will be busy for U.S., Chinese and UK data. There are also several European Q2 GDP reports to digest.
However, the question that needs answering is how much these data points will capture the market’s attention, or will we be focused on the evolving problems in Turkey and any contagion that follows.
Of course, one must not forget that we are now at a peak in terms of the summer holiday season therefore, the events schedule is relatively modest.
There is little in the way of central bank speakers or meetings, the exception being that of the semi-annual testimony from RBA governor Lowe.
Politically, U.S. and China trade tensions are still uppermost in our minds, as will Brexit negotiations, with a further round of high level EU-UK talks taking place on Thursday & Friday. These are being portrayed as to make or break. Time is running out and given the EU penchant for kicking the can down the road one can be forgiven for being cynical.
The Q2 corporate earnings season starts to wind down, though retailers including Wal-Mart will still command attention.
On the economic data points the focus for the U.S. will be Retail Sales, which will be restrained in headline terms (exp. 0.2% MoM) by the drop in Auto Sales, and to a lesser degree the dip in gasoline prices, with core measures seen up 0.4% MoM, sustaining a solid profile for Q3 personal consumption.
After June’s blowout readings for Industrial Production (0.6% MoM) and Manufacturing Output (0.8% MoM), July’s readings are expected to show a more modest pace of expansion, but robust in trend terms at 0.3% MoM for both.
The NAHB Housing Index, Housing Starts, NY & Philly Fed Manufacturing surveys, Q2 Unit Labour costs and Import Prices are also due.
China’s activity indicators are projected to how that Retail Sales growth continues to be restrained, forecasts 9.1% YoY vs. June 9.0% despite assertions from planners that H2 will see a notable pick-up. Industrial Production is seen bouncing to 6.3% YoY from June’s 6.0%, though edging down to 6.6% from 6.7% in year to date terms.
For the UK another raft of data is projected to see CPI unchanged on the month to edge the YoY rate up to 2.5% from 2.4%, with the unwind of seasonal sales discounting, a further rise in petrol prices and some further modest pressure from utility price hikes that are slowly feeding into the index. PPI is seen edging fractionally higher in m/m terms, but little changed in YoY terms as GBP weakness offsets dips in several raw materials prices.
Labour data forecasts imply market reaction will amount to nothing more than a shrug of the shoulders with Average Weekly Earnings forecast unchanged at 2.5% YoY and 2.7% YoY ex-Bonus, with Employment project to post a solid 95K rise. Retail Sales are not expected to punch out too many lights with a rise of 0.2% m/m headline and flat ex-Auto Fuel seen, both highly unsurprising given BRC and other data.
Japanese Trade (exports seen steady at 6.3% YoY , imports to jump on base effects & energy prices to 14.2% YoY), Australia Q2 Wages (median 0.6% YoY for unchanged 2.1% YoY) and Canadian CPI will be the other items of note.