Turkey: Specific Gravity

Turkey: Specific Gravity

Turkey's troubles are both significant and specific to its own status; Argentina made some moves, but markets were not impressed; U.S. household borrowers showed discipline in Q2.

"Money is flowing into the U.S.A. That's terrific."
-Lawrence Kudlow, White House Chief Economic Advisor

Emerging Markets: Specific gravity.  Emerging-market assets have had a rough time recently. The MSCI Emerging Markets Index has fallen about (5.4%) since August 9, the day before the Turkish lira’s latest turmoil erupted.  Since its January 26th high, the index is down some (19.7%) -- in part due to the U.S. dollar’s 6% rise during the same period.

But that fall masks the focused nature of the problems, which, for the most part, have been due to issues in five of the 22 main EM currencies: Argentina, Turkey, Brazil, South Africa and Russia, whose currencies have fallen, year to date, about (38%), (37%), (16%), (15%) and (14%), respectively. Of the remaining 17 emerging-market currencies, 16 have fallen in the single digits. The exception is Mexico, whose peso has in fact appreciated some 3.2% since the end of last year.

So far, the hallmark of this most recent EM challenge has been the lack of generalized contagion – especially compared with the 1997-1998 meltdown, which spread rapidly and dramatically through the global financial system, bringing EM currencies down by an average of nearly 20% between Sept 30, 1997 and Sept 30, 1998 – notable among them the Russian ruble (63%), the Indonesian rupiah (69%), the Mexican peso (24%) and the South African rand (21%).

That’s not to say the troubles in Turkey have been entirely contained; the European banks with known exposure to Turkey have taken a beating in both the bond and stock markets; the common stock of Italian bank UniCredit SpA has fallen some (12%) since August 9, the day before Turkey’s currency lurched downward.

Argentina: Rapid response Argentina’s problems are unique to its own economy and different than Turkey’s, and its reaction to financial markets’ latest rout have differed as well. Argentina’s central bank stepped in immediately on Monday August 13 as its peso was driven down in the wake of Turkey’s troubles, boosting its 7-day rate from 40% to 45% and selling $500 million in dollars to boost its currency. Later in the week, in reaction to the tepid response to a bond offering, the central bank jacked up its reserve requirement by three percentage points to force the banking system to take some 60 billion pesos out of the financial system, where it was suspected they would be used to buy more dollars, forcing the peso down even further.

The move seemed to stabilize the peso at about 29.75 to the dollar, at least for August 16 and 17.  But that’s still a far cry from the 20- and 25-peso levels the central bank tried to hold in May and June, respectively.

The failed offering was intended to retire its one-month notes in favor of one-year notes, increasing its own financing flexibility. The trade was encouraged by the International Monetary Fund as part of its $50 billion credit line to the country.

U.S. households: Credit when it’s due. As EM economies struggle with indebtedness, U.S. economists are watching the level of household indebtedness carefully for signs that family units might be taking undue risk as well.

But that’s not what appears to be happening. According to the New York Fed, household debt rose to a record $13.3 trillion in Q2, some 3.5% from the year-ago level, but borrower stressed continued to fall. Loans slipping into delinquency dropped to 4.52%, the lowest on record since data collection began in 2003. The fall was mostly due to student loans, for which the fall into delinquent status dropped 1.3 percentage points.

Mortgage debt rose 3.5% year-over-year to $9 trillion, with the majority of mortgages going to borrowers with strong credit – some 58% of new mortgage loans were taken by those with scores of 760 and higher.


All data Source: Bloomberg, August 17, 2018, unless otherwise specified.

Emerging markets (EM) are nations with social or business activity in the process of rapid growth and industrialization. These nations are sometimes also referred to as developing or less developed countries.

The MSCI Emerging Markets (EM) Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.



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