Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Access both platforms from your single Saxo account.
How much damage will Turkey inflict on European banks?
Peter Garnry
Chief Investment Strategist
The Turkish crisis continues to unfold with the currency weakening further today to around the 7.0000 level against the USD. It has been suggested by several analysts that a move beyond this point will deplete the excess capital of the major Turkish banks, throwing the country into a banking crisis.
Turkish equities are already down 61% in USD terms since early February, which is a staggering relative wealth decline for the 17th largest economy in the world (according to 2017 International Monetary Fund figures). The key topic of today's session, however, has been contagion risk into the emerging markets space in general but particularly into Europe through the region’s banking exposure to Turkey.
According to the Bank of International Settlements there were foreign bank claims on Turkey worth $223.3 billion, with Spanish and French banks holding the largest claims worth $80.9bn and $35.1bn respectively. The foreign bank claims have grown significantly since 2005 as Turkey’s current deficit worsened materially from a surplus in 2002 to being -5.2% on average in the period Q4'05-Q1'18.
The foreign bank claims figure is large, but to give some perspective the foreign bank claims were around $300bn on Greece going into the financial crisis and $150bn in the summer of 2010 on a much smaller GDP.
When we look at performance among European banks, both Spanish and French banks have incurred steep losses in the past six weeks, and are only surpassed in this area by Italian banks. However, Italian banks are driven by another set of factors including rising government bond yields as investors are nervous about the new government’s plan to increase fiscal spending through flat tax and citizens' income schemes.
Interestingly enough, we observe weakness among German banks as well but here the link is back into Italy and much less about Turkey. The signal that the credit default swap market is sending today is that the probability of Turkey defaulting on its foreign obligations is moving significantly higher and unless we see some positive reaction from Ankara, the crisis could escalate further this week.
Right now, markets are volatile as risk models are sending out decisions to reduce EM risk but it’s important to understand that most major EM countries do not have the same external funding requirements as Turkey and as such there should be no material contagion.
If that was the case we would have expected to see gold being more bid; in fact gold dipped below $1,200/oz in today’s session.
The Spanish and French claims on Turkey are not large enough to materially eat away capital; furthermore, the European financial system and the Markit iTraxx Europe Subordinated Financial Index (measuring credit quality among European banks on their subordinated debt) still trades at historically low levels, not signaling widespread panic.
In our view, European banks may soon be bought against European equities as a mean-reversion play.
Latest Market Insights
Quarterly Outlook
-
-
Quarterly Outlook
Equity Outlook: Will lower rates lift all boats in equities?
Peter Garnry
Chief Investment Strategist
After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto... -
Quarterly Outlook
FX Outlook: USD in limbo amid political and policy jitters
Charu Chanana
Chief Investment Strategist
As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ... -
Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c... -
Quarterly Outlook
Commodity Outlook: Gold and silver continue to shine bright
Ole Hansen
Head of Commodity Strategy
-
Quarterly Outlook
FX: Risk-on currencies to surge against havens
Charu Chanana
Chief Investment Strategist
Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo... -
Quarterly Outlook
Equities: Are we blowing bubbles again
Peter Garnry
Chief Investment Strategist
Explore key trends and opportunities in European equities and electrification theme as market dynami... -
Quarterly Outlook
Macro: Sandcastle economics
Peter Garnry
Chief Investment Strategist
Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p... -
Quarterly Outlook
Bonds: What to do until inflation stabilises
Althea Spinozzi
Head of Fixed Income Strategy
Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ... -
Quarterly Outlook
Commodities: Energy and grains in focus as metals pause
Ole Hansen
Head of Commodity Strategy
Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)