“After just a brief respite, the turmoil in emerging market currencies has resumed. What began in Argentina and Turkey has snowballed into broader collapse in confidence that has policy makers in Indonesia, India, South Africa, and Brazil scrambling to protect their economies.
“Left unchecked, more nations could get wrapped up in the declines, threatening their country’s and the world’s economic growth.
“The Turkish lira, which has been relentlessly setting new all-time lows, proved to be the “canary in the coal mine” for troubles across emerging markets, according to strategists at BNY Mellon. Traders worry about countries with large current account deficits and a large stock of dollar-denominated debt in a world with rising interest rates and a stronger dollar, according to the bank.”
[We have to wonder how bad this could get if the Fed pushes on with further interest rate hikes this year]
“One of the bond market’s biggest investors has seen its flagship funds battered by the turmoil in emerging markets unleashed by Argentina’s spiralling financial crisis. Losses at Franklin Templeton, the US investment group, have underlined how the crisis has wrongfooted many of the market’s best-known names…”
“Fears and doubts continue to swirl in Brazil days after President Michel Temer put the army in charge of highways and the Venezuelan border as his government grapples with an escalating migrant crisis and rising tensions. Tens of thousands of Venezuelans fleeing a collapsing economy, hunger and skyrocketing inflation have entered the country.”
“Turkey raised natural gas prices on Saturday by as much as 14% , two sources said, while the energy regulator announced a similar increase in electricity costs as a deepening currency crisis stokes inflation. The lira has fallen 42% against the dollar this year…”
“Indonesia’s currency continued its weakening trend on Monday, hitting its lowest against the dollar in two decades and prompting the country’s central bank to intervene in the market. The Indonesian rupiah weakened 0.4 per cent to 14,777 per dollar, its lowest since the Asian financial crisis in 1998, according to Reuters data.”
“The financial results of Chinese developers this earnings season have been roundly impressive, but there is one metric that should give investors pause: Firms’ ability to service their debt is the weakest in three years. Cash-to-short-term debt levels at more than 80 publicly traded real estate companies tracked by Bloomberg were 133 per cent on average in the first half, the worst since the first six months of 2015.”
“Growth in output at Chinese factories slumped last month to its lowest level in more than a year, according to data published Monday. The latest evidence of weakness in the world’s second largest economy comes in the midst of China’s trade war with the United States. [China] it has begun to slow down this year, and signs of further weakness are spreading.”
“The Chinese stock market is in the crosshairs of concern over the clash on trade between Beijing and Washington, as well as signs the Chinese consumer is slowing. The CSI 300 index, a gauge of the biggest companies on the Shanghai and Shenzhen exchanges, dropped as much as 1.3 per cent and is now down 18 per cent this year.”
“Manufacturing activity in major Asian economies took a hit from weak export orders in August, a sign firms are starting to feel the pinch from intensifying trade friction between the United States and China that many fear could derail global growth. Surveys of purchasing managers released on Monday showed persistent pressure on key exporting destinations China, Japan and South Korea.”
“The 32 branches of the Bank of Japan, the country’s central bank, have embarked on an emergency survey of companies in each district to grasp the impact of the intensifying trade war on exports and supply chains. The memories of the 2008 financial crisis remain vivid among Japan’s central bankers. Japanese companies are especially vulnerable to a slump in trade, with many shipping materials and industrial equipment throughout the world.”
“Theresa May has insisted she will not be forced into watering down her Brexit plan during negotiations with the EU. Writing in the Sunday Telegraph, the prime minister says she will “not be pushed” into compromises on her Chequers agreement that are not in the “national interest”… Mrs May also warns she will not “give in” to those calling for a second referendum on the withdrawal agreement.”
“Italy’s new anti-establishment government sent contradictory signals to financial markets on Sunday (2 September) amid increasing concern Rome could breach EU spending limits as it comes under pressure to fulfil its anti-austerity electoral promises. With Italy’s debt currently standing at a whopping 132% of output, financial markets appear to be increasingly nervous about the ability of the new populist government to get its finances under control.”
“…work experience is hard to come by in a country [Greece] where four out of 10 young people are unemployed and where the economy is still in a shambles after nearly a decade of financial trauma, austerity measures, tax hikes, pension cuts and massive bailout packages.”
“”It’s as if the financial crisis never happened and the lessons from it are ancient history,” says Jonathan Rochford, portfolio manager at credit manager Narrow Road Capital.
“Amid fervent demand from lenders… below investment grade loans have been stripped of their basic investor protections, like covenants, in recent years. Investors have piled into these risky but lucrative high-yield loans to obtain higher returns… cov-lite loans now make up around 80 per cent of new issuance in the booming leveraged loan market…
“Taxi ride service Uber tapped the market in March, French telecoms giant Altice has built an eye-watering mountain of debt from junk bonds and loans, while Blackstone will reportedly market the US$8bn in risky loans it needs to fund its acquisition of a 55 per cent stake in Reuters’s financial and risk division next week.
“American Airlines, Four Seasons and Dell are other household brands to rely on leveraged loans. Doumar is far from being alone in fearing the explosive growth of this market. The credit ratings agencies, accused of being asleep at the wheel in the run-up to the crisis, are now among the first to sound the alarm.”