Turkey bailout fails to boost TRY, as Italy weighs on the euro

The Turkish lira is the worst performing currency in the FX space today after a spokesman for the German Chancellor ruled out financial assistance for Erdogan’s government. Considering today sees the final tranche of bailout money handed out to Greece, it is unlikely to be one in, one out on the bailout front if Berlin has anything to do with it.

Trump 1: Erodogan 0

Germany may say no now, but it is becoming increasingly likely that Turkey will need significant amounts of financial aid in the months to come. Qatar has come in with a credit line to backstop the economy, and has promised $15bn of investment in Turkey. However, this has not been able to stabilise the TRY at the start of the week, which has suffered another rout today. The problem for investors is two-fold: firstly, Moody’s and S&P, the credit rating agencies, cut Turkey’s debt to junk status at the end of last week, which limits the amount of sovereign debt larger investors like pension funds can purchase, it could also make a bailout by the likes of Germany less likely. Secondly, the spat between the US and Turkey continues to gain pace. As the US threatens more tariffs, shots were fired this morning at the US embassy in Ankora. Until Erdogan’s government frees pastor Andrew Bunson, it is hard to see the Trump administration cutting Turkey some slack. Regardless of your view on the rights or wrongs of what the US is doing to Turkey financially, with Trump as President, it certainly doesn’t pay to mess with the US, especially when you upset the evangelical wing of the US this close to the mid-terms.

Is Ital-exit on the cards?

Stepping quickly away from geopolitical matters, one may have thought that the euro would benefit from the end of the Greek bailout. However, it has experienced no such luck. EUR/USD briefly dipped below $1.14 earlier, the lowest level for 13 months, as fears grow that Italy’s left-wing Five Star Movement coalition could break EU spending rules in its Budget due to be submitted in September.  Tax cuts and a basic income for the poorest are some of the measures that could be introduced in the Budget, and this is spooking Italy’s bond market. Italian 10-year government bond yields reached their highest level since the general election earlier this year. In this environment of politicians not playing by the global rules of finance (read Turkey), the market cannot discount the possibility that the new Italian government may choose to submit a budget that flouts EU’s budgetary rules, which potentially puts them on a collision course with Germany, and potentially towards a EU referendum. Thus, the euro could find itself under pressure for some time.

The weaker euro is no bad thing for the Dax, and European stocks in general, which are a sea of green at the start of this week. As we move into the US session, US futures markets are pointing to a higher open for the S&P 500, the Dow and the Nasdaq. In focus will be Tesla shares, which fell dramatically last week, as Elon Musk publically tried to fight the short sellers that have made Tesla the most short-sold company in the US right now. Interestingly, on a longer-term chart, the Tesla share price still is still well above its long-term average of $247.57, suggesting that, even after the recent dramas, the market has faith in Musk’s long-term electric car-making capability, for now.

The other interesting dynamic of the US market, is that after a torrid July for financials and technology stocks, the S&P 500’s main sectors all appear to be picking up as we move to the late summer. Can Fed Chair Jerome Powell’s speech at Jackson Hole on Friday give the S&P 500 the boost it needs to break back above January’s highs, we shall have to wait and see…