(Bloomberg) -- There isn’t a story across emerging markets this week likely to grip traders quite like the nosedive in Turkey’s lira.
As the nation heads for a full-blown financial crisis, concern that its troubles will sour sentiment toward other developing nations is growing, sending a gauge of implied volatility for currencies up by the most since China devalued the yuan in 2015. An index tracking emerging-market currencies renewed a 2018 low on Monday after dropping the most in more than a year Friday.
The lira’s collapse and its impact on the nation’s banking industry adds to a list of worries that has kept appetite for risk relatively low this year.
“This is another headwind facing emerging markets that has arisen in the past few months,” William Jackson, chief emerging-market economist for Capital Economics in London, said in a note. “China’s economy is now slowing, emerging markets are now tightening monetary policy and the trade war is escalating. This could worsen investor sentiment towards emerging markets and also strengthens our view that emerging-market growth will weaken.”
Most analysts note that even though Turkey is impacting sentiment toward emerging markets, the spillover is likely to be temporary. The financial crisis dragging the lira down is specific to Turkey, according to Capital Economics and Credit Agricole SA.
Turkey Is Unique
“The other risky channel could be increased investor concerns for other countries, which are running a high deficit and are faced with political issues,” Guillaume Tresca, senior emerging-market strategist at Credit Agricole in Paris, said in an emailed note. “That said, in our view, the Turkish situation is quite peculiar.”
Much of Turkey’s trade is linked with the European Union, where lenders with exposure to the local banking industry led the decline in the MSCI Europe Banks Index on Friday.
Elsewhere across emerging markets, China will release industrial production, retail sales and fixed-asset investment data, Indonesia’s central bank will review policy on Wednesday and former Argentinian President Cristina Fernandez de Kirchner faces a corruption trial. And while the Russian ruble’s woes may not be over, there are no concrete signs the U.S. will announce restrictions this week.
Turkey’s Textbook Crisis
- The currency extended its slide Monday in Asian hours after sinking 21 percent last week, the most since 2001;
- “This is a textbook currency crisis that’s morphing into a debt and liquidity crisis due to policy mistakes," says Win Thin, a strategist at Brown Brothers Harriman & Co. in New York. “The way things are going, markets need to be prepared for a hard landing in the economy, corporate defaults on foreign currency debt, and possible bank failures”
- The nation will release unemployment data for May and industrial production for June
- READ: Erdogan Stays Defiant as Turkey Slips Toward Financial Crisis
There’s Always China
- China’s economy has proven relatively resilient to the trade war so far. Industrial production, retail sales and fixed-asset investment data for July due on Tuesday will provide more clues on how it’s holding up
- Factory output growth is forecast to accelerate to 6.3 percent year-on-year, from 6 percent in June, while retail sales are also projected to expand at a faster pace. That may help the yuan to recovery
- The onshore currency has been relatively stable in August after dropping for four straight months
- Brazil’s political season is heating up, and with it the potential answer on Wednesday to a question that has dogged investors for months: Can former President Luiz Inacio Lula da Silva actually run for the top job in October -- even though he’s serving a 12-year prison sentence for corruption?
- Some observers worry that even if Lula isn’t allowed to stand for election, his support for another candidate could upend Brazilian assets. The real has already fallen almost 15 percent this year, among the worst-performing currencies, after a trucker strike weighed on retail sales and consumer confidence
- U.S. Defense Secretary James Mattis meets Brazilian officials to discuss military cooperation between the two nations as well as Venezuela’s deepening crisis
- Indonesia’s central bank reviews policy on Wednesday and could be emboldened to hike again after data showed the economy expanded last quarter at the fastest pace since 2013
- Some 100 basis points of rate hikes by Bank Indonesia over May and June have been credited with helping contain losses in the rupiah, which has fallen about 6 percent against the dollar this year
- President Joko Widodo’s selection of an Islamic cleric as his running mate for elections next year was seen as boosting his chances of re-election and may aid Indonesian assets this week
- Egypt will decide on monetary policy on Thursday. The central bank has kept its benchmark rate unchanged at 16.75 percent since the end of March
Corruption Probe Hits Argentina
- Another former president, Argentina’s Cristina Fernandez de Kirchner, faces her own corruption trial. So far, the probe has been less of a blessing for markets than expected, slowing investment as uncertainty mounts
- The yield on Argentina’s century bonds rose to a record last week and the peso tumbled
- IMF officials begin a nine-day trip to Buenos Aires on Monday to review Argentina’s progress under the terms of a $50 billion credit line with the fund. That agreement provided a bulwark for markets and is seen as a possible lifeline for the struggling economy
- India releases CPI data for July on Monday followed by WPI data on Tuesday. Consumer-price gains are forecast to slow to 4.47 percent year-on-year from 5 percent in June
- Indonesia reports trade data for July on Wednesday, with the balance projected to swing to a deficit from a surplus in June
- Poland will publish final July inflation data together with GDP on Tuesday, with Wednesday off for a public holiday
- The Philippines releases data on remittances from overseas workers for June on Wednesday
- Malaysia reports second-quarter GDP figures on Thursday and will release current-account data the same day
--With assistance from Alec D.B. McCabe.
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