Displaying items by tag: debt

(Washington)

Investors may not realize it yet, but the Fed is in a quite pickle: damned if they keep hiking, damned if they don’t. In what is being dubbed a potential “Dollar doom loop”, the Fed might create a cycle of excessive Dollar strengthening if it keeps hiking. This may cause an overseas debt crisis as many foreign borrowers, especially EMs like Turkey, have issued excessive Dollar-denominated debt. This would in turn put stress on Europe. Additionally, the strong Dollar strengthening would start to hurt US corporate earnings and exports, in turn weakening the economy and possibly causing the Trump administration to move to artificially weaken the Dollar. That said, if the Fed quits hiking, it risks the economy, which is already hot, quickly overheating.

FINSUM: This situation is very real, but luckily we think there is a pretty simple solution—only proceed slowly with hikes. It should be enough to keep the economy in check (given inflation is not high), but not so much as to send the Dollar surging (imperiling foreign borrowers).

(Rome)

Investors in stocks will be familiar with the market’s habit of focusing on an issue for a week or two, getting anxious, and then moving on almost completely once things looks even half-resolved. That is exactly what happened with Italy’s debt crisis a few months ago. However, this problem looks likely to rear its ugly head again. Italy is the third largest debt market in the world, and its looks dangerously close to imploding. That may be why Trump offered Italy funding to help its situation. The big fear is a near-term budget vote where the country’s parties are considering a package that would offer a flat tax rate and universal income for the left, all while ballooning the deficit to 7% of GDP, way above the EU limit of 3%.

FINSUM: Italy is currently led by a pair of parties that hate the Euro, so it seems likely that they may tempt fate with this kind of package. However, there is a potential compromise in the works.

(Rio de Janeiro)

The outlook for emerging markets appears to be dimming. While Turkey’s troubles are well-know, widespread weakness in EM currencies is rattling the markets. EM equities are flirting with a bear market and metals prices have dropped sharply, with the latter hurting EM economies in particular. The worries over EM stocks are now seeping into Eurozone banks, where fears for lending losses are rising. One research analyst sums it up this way, saying “The combination of stronger currencies, lower commodity prices, and potentially weaker bank credit creation is a disinflationary headwind for developed markets in the near term”.

FINSUM: There are many factors which seem to be dragging emerging market economies downward, and that may be a bad sign for the global economy as a whole.

(Istanbul)

There is a big mess going on in Turkey. The country’s spat with the US is playing out in financial markets, and it is really starting to hurt. The Lira is dropping fast, and the country’s benchmark bond yield just hit a whopping 20%. The huge losses in the currency and bond market might also lead to a rout and/or chaos in the country’s banks, which are now only weakly capitalized.

FINSUM: It is important not to muddle Turkey with other emerging markets, as many of its problems are specific to itself. Still, there are similarities and a renewed widespread selloff does not seem out of the question.

(Istanbul)

Emerging markets had a rough first half to the year. Between rising western rates and a trade war, there was not a lot to be happy about in EM assets. Then, a few weeks ago, many sources were saying the bear market was over and it was time for a rally. However, investors need to stay sharp, as EM currencies are still sliding, which will lead to lower growth. Weaker currencies also make it hard to pay back Dollar-denominated debt, which could hurt credit. There are also country-specific issues, like the growing trade battle between Turkey and the US.

FINSUM: There are still a lot of macroeconomic developments moving against EMs, but to be fair, the best rallies start in the darkest hours.