August 10, 2018 / 8:31 AM / 4 months ago

Daily Briefing: U.S. and Russia not so cosy now

BERLIN (Reuters) - Less than a month after Presidents Trump and Putin’s oh-so-cosy meeting in Helsinki, relations between Washington and Moscow seem to be spiraling out of control again.

Russia's President Vladimir Putin gestures during a joint news conference with U.S. President Donald Trump after their meeting in Helsinki, Finland, July 16, 2018. REUTERS/Kevin Lamarque

Prime Minister Dmitry Medvedev has issued an unusually stark warning to the United States this morning, saying Moscow would consider additional U.S. sanctions on its banks to be a declaration of "economic war" and respond to any such steps "economically, politically, or if needed, by other means".

This comes after a series of new sanctions related to the Skripal poisoning and a threat from the U.S. Congress last week to introduce a new sanctions “bill from hell” to punish Moscow for election meddling. Fears of a sanctions spiral have sent the rouble reeling.

Another diplomatic row, between the United States and Turkey, looks unlikely to be resolved anytime soon after a Turkish delegation returned from Washington yesterday with no apparent resolution.

The failure to diffuse the row over Turkey's arrest of an American pastor has pushed the lira currency to a record low against the dollar. President Tayyip Erdogan is brushing off concerns about the economic fallout, blaming "campaigns" against Turkey. The country's finance minister is due to present a new plan for the economy later on Friday.

A new poll by YouGov shows that half of Britons would like a new referendum on whether to leave the European Union if Brexit talks between Theresa May's government and Brussels break down.

Faced with a three-way choice between remaining in the EU, leaving without a deal or accepting a proposal from May, 40 percent favoured remaining, 27 percent backed a no-deal Brexit, and just 11 percent May’s plan.

MARKETS

We appear headed for a major emerging markets crisis, the likes of which has not been seen in years, with the Turkish lira down 10 percent in addition to the 5 percent fall yesterday and all policymakers seemingly missing in action.

All eyes are on Finance Minister Berat Albayrak who is due to announce plans for the country’s economy later in the day.

Worryingly, we are seeing the beginnings of a spillover into other big emerging markets, with currencies such as the rand and Mexican peso selling off heavily last night and continuing that this morning.

Then there is worry about the impact on the developed world -- European Union regulators are apparently getting concerned about banks such as BBVA and Unicredit that have major Turkish exposures. Shares in those banks opened as much as 3 percent lower.

And there is evidence of a dash for safety, with U.S. 10-year and German Bund yields at their lowest in three weeks — 10-year UST yields at 2.90 percent.

One major non-EM casualty is Italy's bond market, already under the cosh from uncertainty ahead of the 2019 budget talks. The Italian/German bond yield spread is 10 basis points wider this morning as that risk aversion weighs and yields are up around 10 bps. Deputy PM Luigi Di Maio is not helping things by suggesting the country scrap its constitutional commitment to a balanced budget.

The other developed market dogged by political risk, Britain, is also seeing its pound weaken further, to the lowest in over a year against the dollar.

The traditional safe haven Swiss franc is catching a bid too — it is at a 2-1/2 month high to the euro. The dollar is at 13 month highs and the euro has fallen under $1.15 for the first time in over a year.

The EM shenanigans have overshadowed the growth outlook worries caused by the trade spat initiated by the United States but Japan’s data reassured this morning, showing annualised second quarter growth of 1.9 percent. Now we are waiting to see if an expected bounce in UK Q2 growth has materialised, while Turkey’s current account data has been a rare bit of good news, showing the deficit narrowing more than expected to $2.973 billion versus a forecast of $3.032 billion.

And lest we get too carried away about the broader impact from Turkey elsewhere, analysts at Berenberg calculate that a 20 percent drop in euro zone exports to Turkey would subtract no more than 0.1 percentage points from growth.

European shares have opened 0.6 percent lower, led down by banks that are being hit by Turkey’s troubles. 

Elsewhere the focus is some corporate updates from Germany, with Innogy posting a first-half profit drop linked to higher commodity prices, while K+S warned 2018 profit may miss market expectations. Eyes also on Ryanair which is bracing for its biggest-ever one-day strike today, forcing the cancellation of about one in six of its daily flights at the height of the holiday season.

Emerging markets are reeling. The lira continues its freefall, dropping as much as 12 percent to plumb a fresh record low of 6.2860 to the dollar before retracing some losses to trade around 7 percent lower. It’s the currency’s biggest daily tumble since the financial crisis in 2008, its worst week since 2001 with a more than 14 percent drop, and its worst month in nearly a decade.

Turkey's President Tayyip Erdogan attends the BRICS summit meeting in Johannesburg, South Africa, July 27, 2018. REUTERS/Mike Hutchings

Turkish Eurobonds have also tumbled to record lows, with average yield spreads over U.S. Treasuries near decade highs.

South Africa’s rand was 1 percent weaker while Mexico’s peso, China’s yuan and Russia’s rouble are all around 0.5 percent lower, and MSCI’s overall emerging currency index is trading at its lowest in more than a year. Emerging stocks extended falls for a third straight day, down nearly 1 percent to hit a one-week low thanks to hefty losses in Asia.

A look at the day ahead from Europe Special Correspondent Noah Barkin and EMEA Markets Deputy Editor Sujata Rao. The views expressed are their own. 

Reporting by Noah Barkin and Sujata Rao; Editing by Catherine Evans

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