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Thrown in The Turkish Bath (Daily Close)

Not even US Stock s were spared on Friday as all US indices closed lower with the S&P and Nasdaq dropping -0.8% led lower by banks and chips. Just as Turkish President Erdogan delivered an incantation asking his citizens to sell dollars and gold to buy the local currency and as the lira was already reeling, D. Trump tweeted on Friday that he would agree to double tariffs on Turkish steel by 50%. This precipitated the Lira into a tailspin, dropping 18% at some point last Friday (before closing -13%). From being just idiosyncratic, Turkish risks morphed into something more serious as contagion spread throughout EM and world stocks without much discernment. European banks where hit to the tune of 3-4% after the FT noted the ECB’s growing concern that European banks could be unduly exposed to Turkish banks credit risks, should the currency continue to plunge. Investors also fretted about Europe being just one tweet away from another devastating Presidential tweet.... German bunds, CHF and JPY all rallied, providing as many signs of mounting global risk aversion. The dollar rallied across the board with RUB, MXN, ZAR all nursing steep losses. EURUSD also fell sharply to its lowest level in a year down to 1.14 (from 1.1528) with most other EUR pairs also trading lower. The dollar broke it’s Bollinger band on the upside suggesting breakout conditions. The fundamental problem is that nobody seems willing to tighten beyond the Fed itself which still bodes well for the near-term dollar outlook, despite the precipitous rally of the past few days. Most FX moves were 2 to 4 sigma events on Friday. EM local currency debt (and some European indices) suffered a 3 to 4 sigma event as well. Obscured by last Friday’s rout, US core CPI came in at yoy 2.4% (headline at 2.9%) last Friday, bringing more evidence that inflation has now started to percolate into the US economy. The monthly US fiscal deficit rose to USD76.9bn (from -42.9bnn for the previous month). 10 Y Treasury and Bund yields fell by 8bps and 6bps respectively. Gold hovered around unchanged on Friday, still unable to capitalize on market turmoil (and rising inflation) due to all-round dollar strength. XAUEUR is rising nonetheless. Although we do not expect one, the risk of a broader correction is rising and with gold sentiment so short and sentiment so poor, the potential for recovery is very real although it is possible that some gold is getting sold against TYR but we doubt much… As markets are now focused on trade issues and EM woes, Middle East tensions are somewhat occulted but D. Trump’s dangerous handling of Middle East relations need to be monitored as well. 


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