David Fuller and Eoin Treacy's Comment of the Day
Category - General

    Seven Things to Keep in Mind About Turkey

    This article by Mohamed A. El-Erian for Bloomberg may be of interest to subscribers. Here is a section:

    No. 7. Growing chatter about capital and convertibility controls
    It’s not a great surprise that there is now more talk domestically about the possibility of Turkey implementing capital controls to limit outflows and counter the dollarization of the economy. This increases the incentive for the private sector (both local and foreign) to accelerate its dis-engagement from the local currency. With that comes even greater financial and economic pressure.

    The bottom line for Turkey is not a pleasant one. Due to the coincidence of domestic and external pressures, the authorities have limited room for maneuver when it comes to policy formulation and financing, especially if they decide to continue to go it alone. It is becoming less and less likely that the government will be able to avoid some combination of higher interest rates, budgetary austerity, recourse to IMF financing and some forms of capital controls. Indeed, the longer it waits to tighten policies domestically and engage with the IMF, the greater the risk that all of this will come about.

    Investors should brace for more volatility for the Turkish lira and bond spreads, as well as more technical contagion for other emerging markets. The spillover for the advanced world -- particularly Europe -- would only become consequential if the sources of contagion were to spread.

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    Indian Equities Fall as Turkey Turmoil Sparks Contagion Worries

    This article by Abhishek Vishnoi for Bloomberg may be of interest to subscribers. Here is a section:

    Indian stocks fell as turmoil in Turkey sparked worries of potential market contagion and damped investors’ appetite for Asia’s best performing equity market.

    The S&P BSE Sensex fell 0.6 percent to 37,644.90 in Mumbai after rallying to new highs in 10 of the past 15 sessions. Risk assets fell globally as Turkey’s lira extended its slide to record lows Monday after the nation’s president showed no signs of backing down in a standoff with the U.S.

    State Bank of India Ltd. slumped more than 3 percent after a third straight quarterly loss while HDFC Bank Ltd. fell 1.1 percent after its deputy managing director resigned. The Sensex’s 14-day relative strength index closed above the oversold demarcation of 70 in nine out of last 12 sessions. It ended at 69.83 on Friday.

    “Turkish lira-led influence seems dangerous as risk-off will impact Indian equities as well,” Deven Choksey, managing director at KR Choksey Shares & Securities Pvt., said by phone from Mumbai. “One should be cautious in putting in new money for the near term as sentiment weakens.”

    So far, of the 47 NSE Nifty 50 companies that have announced results, 27 have either met or exceeded average analyst estimates, as per data compiled by Bloomberg. Tata Steel Ltd. will announce results later in the day. The Sensex has advanced over 10 percent this year, holding its place as the best performing market in the Asia-Pacific region.

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    ECB Must Shield Periphery From Speculation, Italy's Borghi Says

    This article by Lorenzo Totaro for Bloomberg highlights some of the anxieties the Eurozone’s periphery are experienced as the ECB’s bond purchase program winds down. Here is a section:

    With investors turning against Turkey, the government in Rome is trying to avoid Italy being next in line. Italy has had contacts with the ECB to discuss the risk of a speculative attack on its debt, a person familiar with the situation said earlier on Monday.

    Deputy Prime Minister Luigi Di Maio sought to tamp down concerns of a selloff. “I don’t see a real risk that this government will be attacked, it’s more a wish of the opposition,” Di Maio said in an interview with newspaper Corriere della Sera.

    “All know the fence that protects the prey will soon be lifted and the financial speculation easily sees the periphery’s debt as an easy target and is positioning itself ahead of the next developments,” lawmaker Borghi said. "It is significant that an external event like Turkey that has nothing to do with Italy unleashes such an effect.”

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    Erdogan Is Refusing to Accept Economic Reality

    This article by Mark Gilbert for Bloomberg may be of interest to subscribers. Here is a section:

    Policy makers left Turkey's key interest rate unchanged at 17.75 percent when they met last month, compared with economists' forecasts for an increase to 18.75 percent.

    With inflation running at 15.85 percent, that leaves the real interest rate below 2 percent -- an inadequate response to consumer prices accelerating at three times the central bank's target rate.

    The stakes are high. Turkey's domestic institutions have more than $40 billion of dollar- and euro-denominated bonds and loans maturing by 2020, according to data compiled by Bloomberg Intelligence. Every lurch lower in the lira makes servicing those debts more expensive.

    Meantime, foreign banks have exposure to Turkey worth about $224 billion, according to data from the Bank for International Settlements. If the U.S. imposes economic sanctions in retaliation for Turkey's refusal to free American pastor Andrew Brunson, arrested almost two years ago and accused of supporting terrorism, they may be forced to cut those exposures.

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    Credit Market "Eyeball Valuations" Raise Investors' Eyebrows

    This article by Lisa Lee and Claire Boston for Bloomberg may be of interest to subscribers. Here is a section:

    There are key differences between the dot-com era and now. Anastasia, for example, generates profits, and investors’ fear is more that its sky-high profit margins will start to narrow as it tries to grow. And companies like Netflix Inc. can probably generate positive cash flow from their operations by investing less in expansion. A representative for Netflix didn’t return an email seeking comment.

    “You can get comfortable with cash burn if it’s contributing to increases in earnings or building an asset base that that significantly covers the company’s debt," said John Yovanovic, global head of high-yield at Pinebridge Investments, which manages $87 billion.

    Historically, companies struggled to borrow in the bond or institutional loan markets if their Ebitda wasn’t positive. That’s changing, as leveraged finance investors become open to less mature companies. Tesla, for example, sold $1.8 billion of junk bonds last year even though its Ebitda had been positive for only four of the last 11 quarters, according to data compiled by Bloomberg. The company has since posted another four quarters of losses by that measure, and Chief Executive Elon Musk is talking about taking the company private.

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    China, Russia prepare for strategic security talks in Moscow as pressure from United States grows

    This article from the South China Morning Post may be of interest to subscribers. Here is a section:

    After Chinese President Xi Jinping consolidated his leadership position with the removal of a two-term limit on the presidency and Putin won re-election in March, “the basic building blocks for future cooperation on security issues are somewhat more solid”, said Elina Sinkkonen, a senior research fellow at the Finnish Institute of International Affairs.

    “Such language, together with the US sanctions on Russia and trade issues with China certainly influence top level calculations in Moscow and Beijing,” she said.

    Alex Gabuev, a senior fellow at the Carnegie Moscow Centre, said the two neighbours had also seen their interests becoming increasingly overlapped in areas ranging from security in Central Asia to the future of Afghanistan, Africa and North Korea.

    “Both countries want to keep each other in the loop, explain their intentions and cooperate when possible”, he said.

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