If you are a gold bull, this has been a really rough period. While gold has been weakening for years (relative to the market), the last several weeks has been particularly concerning. Despite all the turmoil in global markets that has come alongside Turkey’s financial crisis, gold just hit its weakest level since March 2017. Further, despite many panics in markets this year, gold has fallen 9% and has not gained from its reputation as a safe haven. The rising strength of the US Dollar has not helped gold’s prospects.
FINSUM: Gold is down to around $1,200 an ounce despite all that has happened this year. If the bear market had not been going on so long, it would almost seem like a buying opportunity, but rising rates and a rising Dollar are strong headwinds even if fundamentals changed.
Following a diplomatic spat with the US that has thrust Turkey into an economic tailspin, the country is entering full-blown crisis mode. Turkey’s Lira is down more than 35% this year and fell another 5% overnight. Bond yields are soaring alongside the losses, with the country’s ten-year yielding over 20%, a move exacerbated by Istanbul’s large budget deficit. The crisis is going so badly that the EU is seeking to limit the Eurozone’s banks from exposure to Turkey’s meltdown. BBVA, UniCredit, and BNP Paribas have the most exposure to Turkey.
FINSUM: There is no end in sight to the selloff. The big hope is that Turkey is supposed to unveil a new economic model today that will show how it plans to cut debt and shrink its budget deficit. That would be a start.
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.
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.
Emerging markets have had a rough year, with many major indexes, including in China and Brazil being in or near bear markets. This has led to a great deal of anxiety over the direction of assets, both stocks and bonds, in EM nations. Well, July may be the start of a new phase, at least according to Goldman Sachs. The bank says the emerging markets have hit their bottom and are now poised for a rally. Goldman reminds investors that big asset price moves in EMs are not uncommon, and that this year’s losses are quite ordinary.
FINSUM: The big question here is whether EM equities or credit are a better bet at the moment. Looking historically, credit seems to have a better risk/reward proposition when getting in early in a rally.
Emerging markets have been on a wild ride this year, with many entering into bear markets. But what about EM debt? That market has faced headwinds as the US Dollar is strengthening on the back of expectations for higher rates. However, some bond fund managers really like EM debt right now. While USD denominated debt from countries like Argentina get a lot of the attention, local currency EM debt can be very rewarding. In Brazil and Mexico, for instance, local currency bonds are yielding 10% and 7%, respectively. Other countries with solid local currency debt are South Africa, India, and Indonesia.
FINSUM: So there seem to be two big risks here. One is the exchange rate risk, and the other is credit risk. That said, these yields do seem to be rewarding, and worthwhile if they are a small part of a portfolio.