How markets ignore and ignore events and then at some point a catalyst eventually triggers a reaction. John Authers in Saturday’s Financial Times found more than thirty separate entries when they reported that the Turkish lira has hit a new low. Donald Trump’s political intervention adding fuel to a smouldering situation last week appeared to be the catalyst for investors to start to take note. Dollar strength and emerging market currency weakness fuelling contagion concerns. Mark Twain is quoted to say, “History it was said does not repeat itself but does rhyme”, and the behaviour of banks is a prime example as the Turkish economy boomed so did lending.
The Turkish lira has fallen by over 80 pct, materially impacting Turkeys ability to pay back its dollar-denominated debt. The price of insuring Turkish debt against default in the credit default swap market is now above countries such as Angola, Ghana, Angola and Iraq. Fears of contagion have seen the cost of debt rising in several other emerging economies.
One can only hope after the 2008 financial crisis that the IMF and central banks around the globe are far more coordinated in their response to these events, should they need to be. Helping ensure that the potential for contagion is reduced.
Italy is once again becoming an issue as the yields on 10-year debt are also rising, partly on the back of Turkey and on the continued concerns on what the upcoming budget and will Italy challenge the ECB with its desire to increase spending and reduce taxes?
On a brighter note, the latest forecast for eurozone GDP was an uptick from the previous estimate of 0.3% to 0.4%. Signs remain that the eurozone economy is performing well into Q3. Equities will continue to battle with fundamental economic growth around the globe remaining resilient, whilst concerning itself with the potential impacts political events may have on the economy going forward. We have seen the Federal Reserve raise rates this year, as has the UK. The eurozone will be the next to follow as it ends the bond purchase program. One question that could be on the minds of central bankers as political tensions increase, should they become more aggressive in the coming year to allow themselves the chance to cut again if politics does start to impact economic growth?
Another recent topic for capital markets has been the Elon Musk story as he continues to discuss the possibility of taking Tesla private. The SEC is apparently looking into the comments he posted on Twitter, which cannot be a complete surprise as newspaper report several investors are looking to sue Musk after his comments. Not suggesting for one moment Mr Musk has done this, but misleading the markets and shareholders isvery much frowned upon by the regulators .