Trade tariffs and politics remain key for markets this week with the US set to formalise the next stage of its tariffs on Chinese imports. The outlook for emerging markets are still a key factor to watch too. We consider the outlook for forex, indices and commodities.
After a hectic week of contagion fears and wild market swings, you can be forgiven for wanting some stability to markets this week. And that is not just if you are Turkish! Recent moves on the Turkish lira have been incredible, however, it has had a stay of execution after a cut in the reserve requirement ratio improved liquidity and banking regulators made trading currency swaps involving the lira much harder for foreign banks. However, this will not solve the longer term economic issues. According to the IMF, foreign currency debt is now over 50% of GDP, with c. $180bn being short term debt. This means that as the dollar strengthens further, refinancing becomes ever more expensive. With sharply rising implied inflation (due to lira weakness), huge further moves are needed, such as hiking interest rates by as much as 10%, cutting fiscal spending and possibly even IMF involvement. Turkey is not isolated and there is a mild contagion to European banks, with peripheral Eurozone yields rising. However, Turkey also highlights broader emerging markets (EM) issues as countries with twin deficits are pressured (including South Africa, India, Indonesia and Argentina). Copper is often referred (somewhat crudely) to as “Dr. Copper”, taken as a proxy of economic activity (copper is basically used in everything for economic development). The copper price has moved into bear market territory (-20% in the past two months) as fears over the US trade disputes have grown. The more the rhetoric ramps up, the more EM will be pressured, risk negative and dollar strengthening continues.
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