Turkey: Contagious or Contained?

Turkey: Contagious or Contained?

Turkey's currency crisis spread to European financials, as resolution remained elusive; U.S. consumer prices strengthened; China's central bank reiterated its policy stance in its latest quarterly report.


“If they have dollars, we have our people, our righteousness and our God”
Turkish President Recep Tayyip Erdogan

Turkey: Contagious, or contained?  The plummeting Turkish lira was the subject of a massive market selloff this week, making it the worst performing currency of the year so far at some ‑40%.

Fears of contagion were stoked by media reports of loan exposures to the tune of some €140 billion by banks in Spain, France and Italy. That brought EU bank stocks under pressure, with declines of about 4% as of mid-day Central Europe time. But those figures are anecdotal so far; and it’s not known if these positions were held in Turkish lira or if they were hedged.

The proximate cause of the landslide was the refusal of Turkey’s central bank to increase its base rate from 17.75% at its most recent meeting on July 24 in the face of rapidly rising inflation. The matter was made worse by the lack of substantive policy moves since that date; the president’s son-in-law, now Finance Minister as well as head of the central bank, has been noncommittal. The president’s most recent proposal: for citizens to bring their “mattress money” euros, dollars and gold[1] to their local banks and exchange them for Turkish lira.

Turkish President Erdogan is travelling to regions strongly supportive of his rule, stoking anger at alleged conspiracies of the global financial system and proposing infrastructure projects such as roads and bridges to stimulate growth.

The U.S. has seen tensions with Turkey in recent months, related to Turkey’s imprisonment of an American pastor and differences of policies in the Middle East. On Friday, President Trump tweeted a proposed increase in tariffs on Turkish steel and aluminum.
 

Consumer inflation: One for the hawks  Core consumer prices rose at an annualized 2.4% in July, the highest since September 2006. Including autos and energy, the rise was a strong 2.9%. These figures were slightly above consensus expectations and were good news for “hawkish” supporters of the Fed’s continued steady pace of rate hikes for the rest of 2018 and into next year.

There were downsides to these results, most notably for wage earners: inflation-adjusted average weekly earnings rose at an annualized 0.1%, below expectations and well below June’s 0.5% revised annualized rate. Average hourly earnings actually fell, -0.2%, below June’s 0.0% rate.
 

China: The central bank reports.  According to Bloomberg’s translation, the Q2 report from the People’s Bank of China (PBoC) reiterated its standing policy of not competitively devaluing the yuan, or of using the currency as a tool to cope with external shifts such as trade tension. It described the task of achieving high-quality growth as “arduous” but beneficial in the long run.

 

[1] "Mattress money” refers to money in the form of cash, foreign currencies and precious metals such as gold, that are held in physical form in households, intended as an informal safety mechanism for household wealth.

 


All market-related data Source: Bloomberg, August 10, 2018 unless otherwise stated.

 

 

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