90 seconds at 9 am: Turkish crisis spills over into Asia

Asia equities tank, but EU and US restrain rout; India struggles with fallout; Argentina raises rates sharply; China loosens debt strings; UST 10yr at 2.88%; oil and gold down; NZ$1 = 65.8 USc; TWI-5 = 69.8

14th Aug 18, 7:23am by David Chaston

Here's our summary of key events overnight that affect New Zealand, with news the crisis in emerging markets is rocking first world investors.

Overnight, Turkey's worsening currency crisis sent world equities lower and cut into the value of emerging market stocks and currencies, while boosting the price of assets that investors flock to in a crisis.

This morning, Wall Street is lower, but not excessively so. But late yesterday, Tokyo closed -2% lower in a major reaction. Hong Kong was down -1.5%, and Shanghai was down -0.3%. Sydney closed -0.4% lower while the NZX was down -0.7%. The fact that Wall Street's correction is restrained, and most European markets aren't slipping like the Asian ones did yesterday probably means the immediate threats are subsiding in investor eyes.

But the situation in Turkey is not good. It has alarmed investors by making its central bank a political arm of its President. He has appointed a family member as Finance minister. And he is saying he is looking for 'new friends' and that means NATO's southern flank is now exposed. Turkey is promising a 'new plan'.

The ECB is worried some EU banks are excessively exposed to Turkish risks, which is why bank stocks are getting marked down.

And the fallout extends to India, and to Argentina, where they just raised their policy rate by +500 bps to 45% (not a typo). South Africa is being buffeted hard too. This has all the signs of a contagion.

In China, they are working hard to insulate themselves from the US tariffs, and now this growing emerging market pullback. They are doing it with more debt, "easier credit". In July, Chinese banks beat expectations with +76% jump in lending from the same month a year ago. However, the July growth was less than the June growth, even if it did beat expectations. (They also have a growing bad loans problem.)

The UST 10yr is holding at 2.88%, with the US 2-10 curve still at just +26 bps. The Aussie Govt 10yr is at 2.58% (down -1 bp), the China Govt 10yr is at 3.60% and up +3 bps, while the NZ Govt 10 yr is at 2.60%, down -1 bp.

Gold is down sharply today by -US$18 and now a just at US$1,193/oz in New York. The price of gold hasn't been this low in eighteen months.

US oil prices are soft today and now below US$66/bbl. The Brent benchmark is now just over US$71/bbl. These represent a -US$2 fall, driven it seems by rising production and softening demand prospects, especially by emerging market economies.

The Kiwi dollar is starting today little changed from yesterday at 65.8 USc. On the cross rates we are still at 90.5 AUc, and at 57.7 euro cents. That leaves the TWI-5 at 69.8, unchanged from yesterday but still very near a three year low.

Bitcoin is also little changed at US$6,217 which is just -1.3% lower than this time yesterday.

This chart is animated here. For previous users, the animation process has been updated and works better now.

The easiest place to stay up with event risk today is by following our Economic Calendar here ».

Daily exchange rates

Select chart tabs

Source: RBNZ

Source: CoinDesk

We welcome your comments below. If you are not already registered, please register to comment

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

50 Comments

by theglc | 14th Aug 18, 7:59am 1534190357

The populations in the EMs are going to be on struggle street for the next 10 years while they pay back the debt that has been amassed and frittered away since the last GFC.

The leaders are to blame but the people ultimately have to pay the price.

When will lessons be learnt??? you must live within your means !!!!

by ham n eggs | 14th Aug 18, 8:58am 1534193909

you mean like the mature economies do? LOL
NOONE lives within their means. Thats why we need a debt ponzi.

by steven | 14th Aug 18, 9:03am 1534194201

Do you mean a debt jubilee?

by ham n eggs | 14th Aug 18, 10:30am 1534199455

a debt jubilee is like asking for an Income jubilee....
ie take away the debt and you will find you slash income streams... and everyone is in.
Deflation is uncompromising.

by nymad | 14th Aug 18, 9:22am 1534195374

https://data.oecd.org/natincome/saving-rate.htm

Funny that the majority of developed countries have positive savings rates, huh.

by Roelof | 14th Aug 18, 9:57am 1534197442

maybe that that is because one mans debt ( spending ) is another mans income..
(because in our Monetary system bank created credit is money ).

One of the biggest mis-truths' I heard from Greenspan, in his day, was that a world "savings glut" ( rather than excessive credit growth ) was the problem...

by murray86 | 14th Aug 18, 10:27am 1534199243

Yes and therein lies a part of the problem. A couple of years ago it was revealed that banks lent out at up to 30:1.

In other words if i had $1000 deposited, they would loan out up to $30,000, using my $1000 as security (the modern gold standard). And this is where they make their money They may have only paid out say 5% interest to me (figuratively) but would have charge say 8% on each of those loans.

the numbers stack up like this;

I get 5% on $1000 = $50.

But they get 8% on up to $30,000 = $2400

Not a bad wicket!

by Advisor | 14th Aug 18, 10:23am 1534199026

I attended a forum where the guest speaker, a professor from Tsinghua University, spoke about countries like Canada, US and Australia (also, applies to NZ though) where debt-fueled consumption keeps the larger part of the economy afloat as a majority of people are engaged in low-skilled economic activity of bringing manufactured goods from countries of origin to domestic consumers (retail, food trades, extraction etc.). The exports of these countries are generally commoditized. As a result governments of these nations endorse high immigration and debt-fueled consumption.
The flip side are countries like Austria and Switzerland that employ a highly skilled workforce to produce complex products and services (shady banking, I guess) for the global market. Their governments promote skilled migration and a relatively higher domestic savings rate to allow access to cheap capital from domestic markets for their productive industries.

The CPC envisions China to achieve a mix of high-value export earnings and what seems like debt-fueled consumption growth.

by ham n eggs | 14th Aug 18, 10:28am 1534199285

what .... as a % of GDP (=debt?) I think you need maths lessons.

by nymad | 14th Aug 18, 10:42am 1534200167

GDP is not debt.
That is a fundamentally stupid way to think of things.

But I get your point, as a % of GDP, actual debt may be higher than the savings rate.

by Retired-Poppy | 14th Aug 18, 8:22am 1534191734

NZ needs to be ready for falling house prices here ;https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12…

As long as it doesn't morph into a full blown rout, its healthy and risk reducing.

by Zombie ponzi | 14th Aug 18, 8:35am 1534192516

"We need to brace ourselves for an economy that is no longer underpinned by the "wealth effect". In other words consumers are no longer spending in the surety that their property values will rise by more than they can earn in a year. That has to be contributing to the slowdown in economic growth this year".

Exactly the point I was making on David's business confidence article. Unfortunately I got a heap of flak because I didn't create a table to prove it :)

by MikeM | 14th Aug 18, 9:05am 1534194352

Hopefully this direction will continue. Having NZ return to actually earning its income instead of the borrow and spend economy would make a nice change.

by Foyle | 14th Aug 18, 9:16am 1534195009

I would like that too. But (honest question) what can we do to earn that income? We import about $60Billion a year, and are exporting about $55Billion a year, so currently (in good economic times) a $5Billion trade deficit. We can't compete in manufacturing or high tech due to distance and small internal market/talent pool. We can do primary production but are killing off oil and gas industry ($5billion year consumption that would be better produced indigenously), and mutterings from coalition about clipping wings of dairy, ending aluminium production. Where else can we find the shortfall?

by RickStrauss | 14th Aug 18, 9:21am 1534195312

We can't compete in manufacturing or high tech due to distance and small internal market/talent pool.

NZ does have companies competing in these fields. Even at a low price point, e.g. Sistema.

(Re aluminium, are they discussing ceasing the corporate welfare to Rio Tinto? http://www.stuff.co.nz/business/industries/9723448/30m-subsidy-not-a-ma…)

by Foyle | 14th Aug 18, 12:55pm 1534208156

We _had_ Sistema, now owned by big US corporate who will move production where it is most cost effective. We are too small and too distant with wages that are too high to compete, and International freight of bulky storage boxes is too expensive and slow.

Manufacturing takes a long long time to gestate. 10-20 years to grow to large size after founding. And any sizeable market product will quickly be taken from us by bigger industries in cheaper countries. We can only hold on to small niche products. Outside of food and beverage and secondary industry (to primary production) related 'manufacturing' NZ's manufacturing is steadily shrinking. It's not going to turn around with our high and rapidly increasing wage costs (though plummeting NZD might help).

NZ govt gave Rio Tinto smelter 30million 5? years ago as a sweetener to get them to keep smelter open (which it still is). Film industry receives massive subsidies, as do other industries in various ways. Would you prefer to lose this export industry and the 1 billion a year it brings into NZ?

by frazz | 14th Aug 18, 9:38am 1534196327

Hmm..heard of Xero??

by Ezy | 14th Aug 18, 10:11am 1534198297

Hate to break it to you, but Xero is no longer a NZ company (now on ASX only), as we're too small a country to support a tech business that big. https://www.asx.com.au/asx/share-price-research/company/XRO

by Pragmatist | 14th Aug 18, 10:30am 1534199454

Xero is still a NZ domiciled company. Which exchange your stock trades on doesn't determine where you are based or where you pay tax

by frazz | 14th Aug 18, 10:52am 1534200775

Wrong and wrong again..hate to break it to you ..NZ domiciled company

by mikekirk29 | 14th Aug 18, 8:23am 1534191828

NZ is about to re-remember that it is a small country too dependent on Chinese debt for growth.

by PocketAces | 14th Aug 18, 9:00am 1534194033

There's going to be whole lot of "I told you so's" coming then, and I will be one. We did not have to throw all of our eggs into that basket.

by Andrewj | 14th Aug 18, 8:41am 1534192888

Gold looks to be signalling deflation.

by steven | 14th Aug 18, 9:04am 1534194246

link please?

by Andrewj | 14th Aug 18, 9:25am 1534195545

https://www.theepochtimes.com/what-copper-and-gold-say-about-chinese-gr…

The decline in gold, copper, and the yuan versus the dollar also show how global investors were aggressively betting on a “weak dollar forever” carry trade.

Welcome to the bubble. This bubble does not need a crisis to explode, just a small downward revision of over-optimistic estimates, which leads leveraged bets to go wrong.

Even if we question the extent of the commodity-backed financing risk, there is one thing we simply cannot ignore: net length in the above-mentioned currency and commodities was financed by a dollar carry trade gone wrong. The pain may be far from over.

by Nic Johnson | 14th Aug 18, 9:33am 1534196030

Hi Andrew

I'm not sure if Gold is signalling deflation just yet, it's still propping up my mattress very nicely.

by Andrewj | 14th Aug 18, 9:37am 1534196222

well if it takes less dollars to buy it, it's sure as hell not signalling inflation.

by Advisor | 14th Aug 18, 8:49am 1534193370

What's China's game plan now? How long can they sustain an economy thriving on borrowed time. They are just making things worse for themselves, shooting a syringe full of steroid money into the bubble right before it pops - horrible idea.

by Roger Witherspoon | 14th Aug 18, 9:07am 1534194462

It is all very interesting, as in "interesting times". It will be interesting to see whether Erdogan's path is actually better than the standard IMF path that Argentina is taking. It does seem that Iceland coped far better than Ireland last time around. Icelend basically told the EU and IMF to sod off; whereas Ireland did their Franco/German masters' bidding. Someone, somewhere understands this stuff. It seems part of the challenge is to replace overseas debt with local currency debt without destroying the place. The Vietnam War phrase, "In order to save the village, we had to destroy it" comes to mind. I have a suspicion that Turkey will be less affected than expected and that Trump will fail to bring Erdogan to heel.

It seems this crisis is unfolding like the one before last, roughly 20 years ago, with a series of currency collapses in the periphery; rather than the collapse starting in the centre like the last one. The big question I can't answer is how does this affect us? My guess is we have a significant currency decline down to 60c, maybe even 50c or 40c. I may be either that or a house price decline of 40-50%, which seems unlikely. Any thoughts?

by Nic Johnson | 14th Aug 18, 9:26am 1534195619

Hi Roger

I don't believe it will be an either, or scenario to such dramatic levels of 40c to the NZ$ or 50% off houses. Houses are too high as is the debt on them and the productive sector is strangled by the exchange rate. A weakening of the the exchange rate to 50C over the next couple of years combined with a devaluation of houses by 25-30% is more likely. The housing depreciation won't be a one percentage fits all, what I see is a contraction from the top down, with heavier percentages off the top of the market and lower percentage losses at the bottom (sellers at this sector will still be working but may be trapped by equity positions). The market will be set by those whose circumstances (debt, divorce, death) dictate that they have to move and there will be lots of sellers that just sit there in denial, as is already happening at the top end of the markets in most of our major centres (exception being where the foreign buyers are still purchasing). We'll see but I think a mix of the two scenarios most likely.

by Andrewj | 14th Aug 18, 9:29am 1534195776

it will depend a lot on the interest rate.

by Nic Johnson | 14th Aug 18, 9:54am 1534197243

Not necessarily, the impact of economic growth on earnings prospects could play just as big a part. Things are already tight for the indebted, a few thousand forced sellers as a result of redundancy or a reduction in earnings could just as easily tip the balance without any interest rate changes. Real estate agents, construction workers will already be seeing this happening, if they've geared themselves on the prospect of the good times rolling forever then already there may be a challenge. Remember the savings ratio (buffer) is abysmal in NZ so it will depend on how quickly people can replace income. The market always gets set by those that have to sell.

by Roger Witherspoon | 14th Aug 18, 11:51am 1534204302

I guess there is a bit of wishful thinking in my ideas. I think Tony Alexander once said that it takes unemployment above about 8.5% to cause widespread house price falls. Sounds about right to me. Hopefully, we won't get that, as the fall in the NZD will cushion the blow. I agree with you that it is the houses priced at the top of the market that tend to fall most. Particularly as they hit that 10 to 15 year point where they cease to be fashionable and new, and become unfashionable and dated. The top end like their trophy houses to be shiny.

by steven | 14th Aug 18, 9:06am 1534194374

I watch advchina on the building boom, the quality is awful, even dangerous (they fall down) and they are empty. Just how this will end well I cant fathom.

by MikeM | 14th Aug 18, 9:09am 1534194568

China has Japan 2.0 written all over it. Timing is the uncertain part.

by Andrewj | 14th Aug 18, 8:53am 1534193604

I wrote last week about this deflationary decade:

Complacency may be rampant again today, but CNY is dropping despite the now open presence of the PBOC to countermand that direction. Risk perceptions are rising, not falling (yield and eurodollar curves). And some key indications are right up against the edge of breaking out; the wrong way. Gold’s threatening to fall back into the $1,100’s, EUR is just about May 29 again, and DXY is already marginally higher.

It’s tragically too perfect that complacency disappeared again last week during the eleventh anniversary of August 9. Gold is still just barely hanging in the $1200’s, but I doubt for long. The euro was blasted into the 1.13’s, and DXY was for most of today closer to the 97’s than the 95’s.
http://www.alhambrapartners.com/2018/08/13/unwelcome-august/

by printer8 | 14th Aug 18, 8:59am 1534193961

I don't think that I am a pessimistic - I look forward to and enjoy watching the sun rise every morning.
However, "news of the crisis in emerging markets" just adds to the other dark clouds on the economic horizon especially as such markets are more prone to be first to feel the effects of increased risk.
It is easy to be so right in hindsight; looking ahead may not be certain but is of far more importance. To me such comments are another indicator that the relatively stable economic conditions of the past may be changing.
So thinking out aloud:
Along with a cooled housing market, globally share markets are not showing the growth that they have over the past decade and so far this year they have been relatively flat.
So why not move that KiwiSaver account to a slightly (note "slightly") more balanced or moderate fund? There is currently no strong indicators of upside for share markets, and October is often not a good time for markets.
Come Christmas and if the new year is looking more promising, then why not move it back to the more aggressive fund?
Given that aggressive funds performance are likely to be less subdued compared to recent years, even if events don't deteriorate, then such a move is not going to be costly for that assurance (and most fund providers do not have a fee for changing one's fund).
I will make a point of commenting on the outcome of this in February (six months away).

by Andrewj | 14th Aug 18, 9:02am 1534194124

This doesn’t necessarily mean that a full-blown Chinese recession is imminent. We have to maintain even and rational analysis so as to avoid the making the opposite mistake as inflation hysteria. In other words, China’s bond market is projecting a dramatic shift in perceived risks. The Chinese economy may not yet be set afire.

http://www.alhambrapartners.com/2018/08/13/the-smoke-thickens-in-china/

by steven | 14th Aug 18, 9:08am 1534194523

I wonder if this will be the trigger for a full blown 2nd Great Depression?

by puketepapa | 14th Aug 18, 9:24am 1534195497

The first one hasn't finished yet

by Pragmatist | 14th Aug 18, 11:13am 1534202039

Pretty sure it ended in the 1930s..

by Andrewj | 14th Aug 18, 9:19am 1534195148

ROME (Reuters) - The economic spokesman of Italy’s ruling League party warned on Monday that unless the European Central Bank offers a guarantee to cap yield spreads in the euro zone, the euro will collapse.

“The situation can’t be resolved, and it is going to explode,” Claudio Borghi told Reuters after Italian, Spanish and Portuguese government bond yields rose in the wake of the financial turmoil in Turkish markets.

https://www.reuters.com/article/us-italy-ecb-euro-spread/italys-league-…

by Roger Witherspoon | 14th Aug 18, 11:32am 1534203159

Turkish default imminent?
For a country with large foreign currency debt, in particular, a mass sale of local assets to foreigners or a crushing recession delivering a major current account surplus are the only ways to repay excessive levels of such debt.
https://www.zerohedge.com/news/2018-08-13/russell-napier-turkey-will-be…

by Andrewj | 14th Aug 18, 9:45am 1534196734

It's now a red card

https://www.weforum.org/agenda/2018/02/a-yellow-card-for-the-global-eco…

by Boatman | 14th Aug 18, 10:51am 1534200717

The Euro Banking system is carrying loads of Non-performing Loans that have been 'rescheduled " which basically means that the Banks are not treating them as bad loans , but have extended the term or put them on "interest only' arrangements .

Quite apart from the blatant contravention of the Basel rules in not recognizing bad debts ( called "marked to market") , there are all sorts of good reasons to recognize likely bad debts and raise provisions for such event

Now all it takes is one or two Sovereign defaults ( such as Turkey or or South Africa or Greece or Argentina or Mexico or Brazil ) to end up with a Number 1 haircut , and add to that a pile of Corporate debt in property development (Turkey ) and speculative share trading , to unravel the whole debt pile

by waymad | 14th Aug 18, 11:22am 1534202534

Talked, over a cawfee, to an ex-Seth-Efrican this very morn, and the news from there is that it's all over, Rover. The talk of land appropriation from farmers with zero compensation is gonna go down the Zimbabwean path to subsistence ag, but with a twist. In Z, the farmers walked away with just their shirts: all the gear and houses, barns, assets were still there to use. But in SA, the farmers are busy selling all that, so the incoming will start with nothing but the land and a debt pile. So banks will be reluctant to lend further, especially to inexperienced folks with zero assets to farm with except the land....

Straw, camel, back....

by Boatman | 14th Aug 18, 10:54am 1534200845

https://www.express.co.uk/dff798fd-b250-4c02-a20c-5a84987e5938

by Boatman | 14th Aug 18, 10:55am 1534200911

blob:https://www.express.co.uk/dff798fd-b250-4c02-a20c-5a84987e5938

by Wilco | 14th Aug 18, 11:23am 1534202580

On a much smaller scale - I have a question for the experts out there. What is the impact of all this uncertainty on my interest rate going forward. After last week's Reserve bank forecast of lower for longer and Fonterra's dismal performance (if you are a supplier/shareholder not a manager) bond rates dropped reasonably significantly although the NZ spread remained around 90 pts but on the same day my bank increased my floating rate by 10pts. And what impact will a weakening NZD have on interest rates going forward? Any thoughts please. Do I fix or stay floating?

by Andrewj | 14th Aug 18, 12:18pm 1534205912

all going swimmingly
https://pbs.twimg.com/media/Dkf_ZjlXcAEIvm_.jpg