Weekly guest column: As the charade comes down
[Yesterday’s market turmoil was indeed mind boggling: Copper tumbling to a below $8,000 per ton, euro crashing to $1.345, Brent oil shedding more than $4 a barrel in a matter of minutes, gold falling by $50 an ounce and even heavy selling in wheat and corn – a bloodbath indeed.
On the other end of the imbalance rests the U.S. dollar: The status of being the global reserve currency is so powerful that a signal of “no new quantitative easing” from the Federal Reserve is enough to trigger a flight to the greenback, despite an ongoing zero-interest-rate policy. Investors are unable to find refuge anywhere but U.S. government bonds - benchmark 10-year U.S. Treasuries were yielding a ridiculous 1.76 percent as I write this column.
At this point, the real question for Turkey is the spillover effect from a perfect storm consisting of a “very, very possible” debt default in Greece, a miserable U.S. economy and rising tensions in the Middle East.
A gaze into the markets show that two options may emerge: the “hot money” that Turkey so needs will either dump emerging market (EM) assets and run to a perceived “safe haven,” or will bet that at least some emerging economies are strong enough to resist the financial storm.
Regarding the geography, no clear trend has emerged yet. However, regarding asset classes, a clear choice to shun equities and EM currencies and to orient toward sovereign bonds seems to be the case here.
Yesterday, the U.S. dollar hit a new record of 1.83 Turkish lira, and the lira looks “healthy” compared to the Brazilian real, which shed 12.6 percent only this week. In the past four weeks, the Turkish currency has lost 3.4 percent against the dollar, while losses for Hungary’s forint, Poland’s zloty and South Africa’s rand have been 12.6, 11.9 and 11.5 percent, respectively. “In 2008-2009, it took seven-eight months for EM currencies to depreciate. This time things seem to develop somewhat faster,” warn Nordea analysts Aurelija Augulyte and Elizabeth Andreew in a fresh analysis.
The run to the dollar is matched in equity markets by heavy selling across the world, including in Istanbul. Foreigners’ share at the Istanbul Stock Exchange has retreated to just below 61.9 percent, while global stocks fell by 4 percent yesterday on average.
In contrast, foreigners’ share in outstanding Turkish government bonds has climbed to 16 percent, rising steadily since March 2010. Their share in the eurobond market has also increased to 45.1 percent, according to recent data.
And Turkey is no exception. In Indonesia and Mexico, for example, the share of outstanding bonds held by foreigners is 35 and 41 percent, respectively. Note that the local-currency credit rating upgrade by S&P came precisely because of the “expansion of local debt markets” outlined above.
Since the start of the year, EM local currency bond funds received inflows of $11 billion, according to EPFR data. In the same period, EM equity funds saw outflows of $22 billion. This corresponds to a “net negative” of $11 billion for EM currencies, Imran Zaheer Ahmad of RBS notes.
Thus, a two-pronged approach seems to be in action here. As opposed to the “sell everything, pack up and leave” mentality in the 1990s, foreign investors are differentiating between countries and assets, maybe because there’s not much profit back home. The more than $17 billion they keep in Turkish bonds surely comes as a relief for a hot-money-dependent economy. However, a Greek default might trigger a “nostalgic” sell-all attitude, which could in turn show that S&P’s rating upgrade is as fleeting as Turkey’s balance of payments.]
Another timely and well-written column by Taylan. I have a few comments: First, while emerging market bonds might be in better shape than equities, they are not faring that well, either. Here’s what EPFR, which tracks global funds flows, has to say for the latest data: “The prospect of even looser monetary policy in key developed markets, and the economic weakness behind it, saw Emerging Markets Bond Funds post the biggest net outflow in dollar terms among the major bond fund groups. Institutional redemptions from these funds, which have acquired a degree of safe-haven status this year, were the highest since early 2Q09.”
As for the reasons behind the turmoil, Taylan concentrates on U.S. monetary policy, which is probably the prime suspect. But I could come up with several other suspects: Chinese manufacturing continues to contract; Fed has warned about risks regarding the U.S. economy; THE EURO AREA (not only the Greece and Italy woes, but also gloomy European PMIs); Moody’s downgrade of American banks and last but the least the perception that “the twist” was not enough.
As for the lira, I agree with Taylan that the lira performed better than most EM currencies during the past few days. But note that “ceteris paribus” is not satisfied here. For example, the Central Bank sold USD 350mn of FX on Tuesday and the ratings upgrade on the same day supported the lira, albeit only temporarily, as well. Besides, if you look at the longer-run, a different picture emerges:
As you can see in this table from Garanti Asset Management, the lira is one of the worst-performers over the three and especially six-month horizon. But again this is not ceteris paribus. In fact, most of the previous lira weakness was policy-driven, as the Central Bank undertook unorthodox monetary policies at the end of last year to fend off capital flows. BTW, it has been barely nine months over those, and we are in a completely different world now. Unf—-ing-believable, if you’d pardon my French:)…
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