The Turkish Lira crashed last week after talks between the Trump administration and Turkish delegation failed to defuse tensions over the detention on terror charges of an American Pastor, Andrew Brunson. President Trump announced on Friday that he had « authorized a doubling of tariffs on steel and aluminum » imports from Turkey, thereby exacerbating investors’ fears about the country’s ability to sustain its debt. The Turkey 10-Year bond yield surged above 20.5 percent and the 5-Year CDS spread exceeded +400bps.
The free-falling lira (down 40 percent YTD) sent the euro lower (EUR-USD at the lowest level since July 2017, below the 1.15 support mark) and hit stock markets by contagion, more specifically European and emerging markets. Investors were indeed worried about the exposure of European banks to Turkey. Hence the poor performance exhibited by this sector, by contrast with more defensive sectors such as healthcare.
Conversely, the Turkish lira meltdown pushed market players to the relative safety of Treasuries (flight-to-quality reflected by the U.S. 10-Year Government bond yield below 2.90 percent and the 10-Year Bund yield now below 0.35 percent).
Find the full report here : https://www.trackinsight.com/weekly-flow-report/2018-08-10/global