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Weekly Commentary: Turkey (Nudged Over the Cliff)

August 14, 2018

Weekly Commentary: Turkey (Nudged Over the Cliff)

The Turkish lira sank 13.7% in chaotic Friday trading. The lira’s 21.0% “worst week in 17 years” collapse pushed y-t-d losses to 41.1%. Turkish 10-year yields spiked to almost 21%, before retreating somewhat. After beginning the year at 155, Turkey sovereign credit default swaps (CDS) spiked 166 bps during Friday trading (up 199 bps for the week) to 437 bps (high since Feb. 2009).
EM Contagion Effects gained momentum this week. Friday trading saw the Argentine peso hit 3.8% and the South African rand sink 2.7%. For the week, the Argentine peso fell 6.6%, the South African rand 5.5%, the Brazilian real 4.0%, the Hungarian forint 2.2%, the Romanian leu 2.1%, the Polish zloty 2.2% and the Mexican peso 1.8%. On the (local) bond yield front, 10-year yields in Brazil jumped 66 bps, Russia 40 bps, Hungary 15 bps and South Africa 13 bps. As global “hot money” frets faltering liquidity and the next shoe to drop, Brazilian equities sank 5.9% (as Brazil sovereign CDS jumped 24 bps to 237 bps).

August 10 – Bloomberg (Lionel Laurent): “Turkish President Recep Tayyip Erdogan has been standing firm as investors dump his country’s assets at an alarming pace, saying: ‘They have got dollars, we have got our people, our right, our Allah.’ European banks with substantial investments in Turkey will hope some of that divine providence rubs off on them, too, after sticking with a bet that has gotten more perilous over time.”

Fears of contagion this week were not limited to the emerging markets. With significant exposure to Turkey, European bank stocks were slammed in Friday trading. Unicredit sank 4.7% and ING Groep fell 4.3%. The big German banks, Deutsche Bank and Commerzbank, dropped 4.1% and 3.5%. European Banks (STOXX600) fell 1.9% Friday.

August 10 – Financial Times (Claire Jones, Ayla Jean Yackley and Martin Arnold): “The eurozone’s chief financial watchdog has become concerned about the exposure of some of the currency area’s biggest lenders to Turkey – chiefly BBVA, UniCredit and BNP Paribas – in light of the lira’s dramatic fall…

…click on the above link to read the rest of the article…

“EM FX Never Lies” – BofA Warns As Brazilian Real Is Routed

June 7, 2018

“EM FX Never Lies” – BofA Warns As Brazilian Real Is Routed

Mohamed El-Erian warned overnight that Brazilian policy makers are “in quite a tricky position — and there’s little room for error,” and judging buy this morning’s rout in the real, he is dead right.

Crippling nationwide trucker strikes, which prompted the resignation of Petrobras CEO, and forced Brazil and Argentina to roll back their planned fuel-price increases have, according to Bloomberg’s Davison Santana, undermined their already fragile currencies and deter investors eager for signs authorities are serious about putting fiscal accounts in order.

Brazil’s projected budget deficit as a percentage of gross domestic product stands at 7.4 percent, the highest among major emerging-market peers.

The gap, as El-Erian explained succinctly, leave government with a stark choice: keep borrowing or cut spending.

As Santana notes, borrowing more isn’t a healthy option. Higher deficits make currencies less attractive, leading to rising interest rates that reduce growth and erode government revenue in a cycle that ends up, you guessed it, swelling the deficit. Reining in spending typically makes more sense. That’s why it’s all the more remarkable that Brazil recently capitulated in their efforts to remove artificial price controls that kept fuel costs low. After all, it’s much harder to reduce spending while maintaining subsidies.

So where does this leave the real? It means authorities will have to keep intervening in currency markets, a costly use of foreign-exchange reserves that can only stop for good once the nations tackle their underlying fiscal problems. And indeed, after Brazil’s real tumbled to a two-year low on Tuesday, the government effectively tripled its support – which has already failed dismally.

A month ago we explained how critical the Brazilian Real is to identifying just when the Emerging Market turmoil will go viral.

…click on the above link to read the rest of the article…

Brazil Steps Up Intervention to Support the Real: Reflections on Currency Wars

June 6, 2018

Brazil Steps Up Intervention to Support the Real: Reflections on Currency Wars

Winning currency wars is easy. As with trade wars, one may not care for the end result.

Brazil’s central bank bolstered efforts to shore up the currency after it tumbled to the weakest level since former President Dilma Rousseff’s tumultuous impeachment in 2016.

The real has weakened 12 percent since the end of March, the worst performance among 16 major currencies tracked by Bloomberg, as investors grow concerned that October elections could usher in a new president less attuned to investors and business. Fear that moves seen as key to fixing fiscal problems would be derailed have exacerbated what’s already been a lackluster year in emerging markets. The real fell 0.9 percent to 3.7791 per dollar as of 11:55 a.m. in New York, and earlier reached 3.8056, the weakest since March 2016.

Brazil Declares Currency War

Brazil has declared a fresh “currency war” on the US and Europe, extending a tax on foreign borrowings and threatening further capital controls in an effort to protect the country’s struggling manufacturers.

Guido Mantega, the finance minister who was the first to use the controversial term in 2010, said the government would not “sit by passively” as developed nations continue to pursue expansionary monetary policies at the expense of Brazil.

“When the real appreciates, it reduces our competitiveness. Exports are more expensive, imports are cheaper and it creates unfair competition for businesses in Brazil,” he said on Thursday after announcing changes to the so-called IOF tax.

What a Hoot

Note the irony. The Brazil currency war was really about trade.

This was my comment at the time: “Mathematically speaking, the desire for every country to be net exporters is impossible. Massive trade wars are on the horizon as a result.”

…click on the above link to read the rest of the article…

Weekly Commentary: Crisis Watch

May 19, 2018

Weekly Commentary: Crisis Watch

Where to begin? Contagion… The Argentine peso dropped another 5.0% this week, bringing y-t-d losses to 23.7%. The Turkish lira fell 3.9%, boosting 2018 losses to 15.4%. As notable, the Brazilian real dropped 3.7% (down 11.5% y-t-d), and the South African rand sank 4.0% (down 3.0% y-t-d). The Colombian peso fell 3.0%, the Chilean peso 2.7%, the Mexican peso 2.7%, the Hungarian forint 2.3%, the Polish zloty 2.1% and the Czech koruna 2.0%.
EM losses were not limited to the currencies. Yields continued surging throughout EM. Notable rises this week in local EM bonds include 54 bps in Brazil, 27 bps in South Africa, 34 bps in Hungary, 36 bps in Lebanon, 25 bps in Indonesia, 28 bps in Peru, 14 bps in Turkey, 20 bps in Mexico and 11 bps in Poland.

Dollar-denominated EM debt was anything but immune. Turkey’s 10-year dollar bond yields spiked 41 bps to 7.16%, the high going back to May 2009. Brazil’s dollar bond yields surged 29 bps to 5.58%, the highest level since December 2016. Mexico’s dollar yields jumped 18 bps to 4.64%, the high going all the way back to February 2011. Dollar yields rose 19 bps in Chile, 28 bps in Colombia, 19 bps in Indonesia, 14 bps in Russia, 14 bps in Ukraine and 167 bps in Venezuela (to 32.80%). Losses are mounting quickly for those speculating in EM debt.

Developed bonds were under pressure as well. We’ll begin with Italy:

May 17 – UK Guardian (Jon Henley): “Italy’s new government, likely to be formally confirmed within the next few days, sets a perilous precedent for Brussels: it marks the first time a founding member of the EU has been led by populist, anti-EU forces. From the EU’s perspective, the coalition of the anti-establishment Five Star Movement (M5S) and the far-right League looks headstrong and unpredictable, possibly even combustible. Leaked drafts of their government ‘contract’ include provision for a ‘conciliation committee’ to settle expected disagreements. Mainly it looks alarming. Both parties toned down their fiercest anti-EU rhetoric during the election campaign, dropping previous calls for a referendum on eurozone membership…

…click on the above link to read the rest of the article…

Brazilian Real Crashes Most In 4 Years As Hope Fades

December 30, 2015

Brazilian Real Crashes Most In 4 Years As Hope Fades

Following recent strength on the heels of hope for a new finance minister, news that Ruosseff has sent the minimum-wage-hike Bill to Congress appears to have crushed the hype of any fiscal rectitude and sent Real tumbling. Down over 4% – the most since September 2011 – BRL is back above 4.00 per USD, giving up all the recent gains.

Broad weakness in EMFX…

Seems to have been exacerbated by:

  • *BRAZIL ROUSSEFF SENDS BILLS ON CIVIL SERVANT WAGES TO CONGRESS

A Bill that could cost BRL 4.77 billion, wrecking hopes of any improvment in the fiscal situation. As Bloomberg reports,

Brazil’s bigger-than-estimated minimum wage increase and potential credit expansion make it harder for govt to control around 11% on year inflation and cut budget gap, Marcelo Schmitt, portfolio manager at investment firm Sul America, says in a phone interview.

These initial policy steps after Barbosa replacing Levy as finance minister are concerning, says Schmitt.

And so…

This is the biggest drop in BRL since September 2011.

Charts: Bloomberg

Is Brazil About to Drag Down Spain’s Biggest Bank?

September 13, 2015

Is Brazil About to Drag Down Spain’s Biggest Bank?

The timing could not have been worse.

In July last year, an analyst working for Banco Santander Brasil did something he shouldn’t have. He warned the firm’s private banking clients about the economic risks posed by the reelection of Brazil’s scandal-tarnished president, Dilma Rousseff. Those risks included a sharply devalued Brazilian real, rising interest rates, runaway inflation and tumbling shares.

When the analyst’s report went public, it provoked outrage from Rousseff’s party, which saw it as a direct intervention in the country’s general election. Santander’s now-deceased CEO Emilio Botin was given a choice: either he castigated the analyst and rejected his findings, or his bank’s extremely cozy ties with the government of its most profitable market could be in danger.

It was not a difficult decision. Within days the analyst was fired for “making a mistake.” Now, a year and two months later, it’s obvious that the analyst’s warnings were spot-on. Rather than firing him, Santander should have listened to him.

Instead of reducing its exposure to Brazil’s fragile economy over the last year, as HSBC has done (read: Does HSBC Know Something Others Don’t), Santander has doubled down on its bet, forking out €4.7 billion on the acquisition of the remaining 25% of its Brazilian unit.

A Slap in the Face

The timing could not have been worse. Yesterday, Brazil’s already troubled economy was given another long-expected slap in the face when Standard & Poor downgraded the country’s debt from investment-grade to junk status.

The impact was immediate. Brazil’s currency plunged from 3.78 Real to the dollar to 3.9. It’s currently hovering at 3.88. Just a year ago, when news of the government’s Petrobras scandal began hitting and the economy’s biggest threats – a weakening China, the abrupt end of the commodity super cycle, a strengthening dollar, and floundering internal demand – were beginning to surface, the currency was clocking in at 2.35 Real to the dollar.

…click on the above link to read the rest of the article…

 

 

 

Brazil’s Economy Is On The Verge Of Total Collapse

January 30, 2015

Brazil’s Economy Is On The Verge Of Total Collapse

Back when the BRICs were the source of marginal global growth, the punditry couldn’t stop praising them. However, in the past year, now that China’s housing bubble has burst and its shadow banking system has imploded, those who remember what BRIC actually stood for are about as rare as those who recall what it means for the Fed to hike rates. Which is precisely why nobody in the mainstream financial media has commented on the absolutely abysmal economic update reported earlier today out Brazil.

We are happy to do so because today’s data follows up quite well to our article from a month ago “Brazil’s Economy Just Imploded” and as the earlier article on the crashing Brazilian Real hinted, things for the Brazilian economy how gone from imploding to, well, worse because not only did the twin fiscal and current account deficits rise even more, hitting a whopping 11% of GDP – the worst since August 1999, but its government debt soared to 63.4% in 2014, up from 56.7% a year ago, and the highest since at least 2006. In short – the entire economy is now on the verge of total collapse.

This is what happened in a few bullet points:

  • The fiscal picture has deteriorated very sharply since 2011 at both the flow (fiscal deficit) and stock (gross public debt) levels. The primary and overall nominal fiscal surpluses at year-end 2014 were at levels last seen in the late 1990s.
  • The steady decline of the public sector savings rate is leading to a wider current account deficit despite weaker growth and low investment. In fact, the twin fiscal and current account deficits are now tracking at a combined, very troublesome 10.9% of GDP, the worst picture in 15 years (since August 1999). Repairing the severely unbalanced macro picture would require a deep, structural and permanent fiscal and quasi-fiscal adjustment and a significantly weaker BRL.
  • The new economic team faces, among other things, the very significant challenge of repairing the severely deteriorated fiscal picture.
  • The steady erosion of the fiscal stance pushed net and gross public debt up. Furthermore, fiscal and quasi-fiscal activism undermined the effectiveness of monetary policy, contributed to keep inflation very high and drove the current account deficit to a very high level despite weak growth.

…click on the above link to read the rest of the article…

 

 

Olduvai IV: Courage
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Olduvai II: Exodus
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