There has been a large reaction across markets to the Financial Times report of European bank exposure to Turkey and continued to give the TRY weakness. After the first 2 hours of high-volatility trading, markets seemed to settle into tentative ranges right before the Turkish President Erdogan’s speech. The TRY initially surrenders and falls approximately 45 big figures, the USDTRY is at a high of 6.3005 before holding below 6.0 for the bulk of the session. EURUSD runs stops as it broke below the barrier level of 1.15 with the DXY spiking to Year-to-Date with consequent USD bid seen across all pairs.
The U.S. Treasuries and bunds rally, however, the outright move is not extreme, while the 10-year bund yields were lower by 3.5bps. Small flattening in the Eurodollar and Euribor curves, with the iTraxx sub-financial index wider by 12.5bps but the move is not severe compared to historical standards.
European equity markets selloff steadily, banks underperform with BBVA, UniCredit and BNP Paribas in focus; similarly, all three fell 3.5 – 4.0% which is not an abnormal reaction. Mining stocks also weaker as Russia considers a new mining tax of $7.5b, which also weighs on metals across the board.
In the key headlines for the European session:
- Financial Times: ECB Single Supervisory Mechanism sees BBVA, UniCredit, and BNP Paribas as particularly exposed to the TRY selloff and does not see the situation as critical yet. Risks are Turkish borrowers may not be hedged against the TRY weakness and begin to default on foreign-currency loans.
- Russian Prime Minister Medvedev: If the U.S. introduces sanctions against Russian banks, it be will be seen as a declaration of “economic war” and Russia will respond accordingly with economic, political and other measures if necessary.
- The U.K. Q2 GDP q/q: 0.4% vs 0.4% estimate; Services 0.5% vs 0.6% estimate; Private Consumption 0.3% vs 0.4% estimate; ONS says net trade a 0.8 ppts drag on Q2 GDP.
- Repubblica: Italian Government sees 2019 deficit/GDP ration 1.7-1.8% vs previous Government target of 0.9%.
- Japan Q2 GDP 0.5% vs 0.3% estimate; annualized 1.9% vs 1.4% estimate.
The European session is taken over by the American one, investors look towards the last day of the week with some big news coming in from the Turkish President urging his citizens to convert their Dollars, Euros, and Gold into the Turkish Lira to combat what is happening to the local currency.
The U.S. will wake up to his shouting, as he screams into the microphone as if it is one of his political campaign rallies. Moreover, in the North American Session, Canada, and the U.S. will have some important news for the day with unemployment data from Canada and Inflation data from the U.S. The dollar for the day has been king as it continues to rally against its Group-of-10 peers prior to the news. Should the news come in positive it will add fuel to the fire, while a bad figure won’t deter the momentum for long as investors seem more focused on leaving Emerging Currencies behind.
The euro slid to the weakest level in more than a year against the dollar amid concern the Turkish lira’s plunge will have spillover effects on European banks. Europe’s equities traded in a sea of red while the greenback, Treasuries, bunds and the yen rallied on haven demand.
EUR/USD – EUR/USD dropped as much as 0.8% to 1.1432, the lowest level since July 2017.
USD/TRY – USD/TRY jumped as much as 13.5% to a record amid falling investor confidence in the nation’s authority’s ability to stem a market rout.
USD/JPY – USD/JPY fell as much as 0.4% to 110.61 before paring the decline to 110.95. Yen strengthened after data showed Japan’s GDP grew an annualized 1.9% q/q last quarter, beating the median forecast of 1.4%.
AUD/USD – AUD/USD dropped as much as 1.3% to 0.7281, while NZD/USD fell as much as 0.6% to 0.6571.