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Turkey

On Monday the Turkish lira pulled back from a record low of 7.24 to the dollar after the central bank pledged to provide liquidity and cut reserve requirements for Turkish banks.  The currency has lost more than 40 percent against the dollar this year amid concerns about President Tayyip Erdogan’s influence over the economy and his repeated calls for lower interest rates and worsening ties with the United States.  Last Friday the lira dropped as much as 18 percent, hitting US and European stocks as investors were scared over the exposure of the banks to Turkey.  The central bank last month left interest rates unchanged despite double-digit inflation and tumbling lira and announced the plans about liquidity and reserves after the Finance Minister Berat Albayarak said that authorities will start implementing an economic action plan on Monday.  The bank cut the lira reserve requirement ratio, a cash buffer held by banks, by 250 basis points for all maturity brackets and lowered reserve requirement ratios for non-core FX liabilities by 400 bps for maturities up to three years.  The move will free up 10 billion lira, $6 billion, and $3 billion equivalent of gold liquidity in the financial system according to the bank.  It also pledged to provide ‘all the liquidity the bank needs’.  After the announcement by the Central bank, Turkish bank shares and their dollar bonds tumbled and Turkey’s sovereign dollar debt fell.  Albayarak further added that budget discipline would be the most important foundation of Turkey’s new economic approach and fiscal rules would be implemented for targeted indicators if necessary.  He said that a plan has been prepared for banks and the “real economy”, including small to mid-sized businesses which are most effected by the foreign exchange fluctuations. The Turkish lira rallied as much as 7 percent on Wednesday after authorities made it more difficult for banks to short the lira through the swap market.  This action by the bank came after President Recep Tayyip Erdogan’s administration following up on his call to boycott US electronics, with the announcement of an additional tax on a broad range of American goods.

Indonesia Raises Rates

The Central Bank of Indonesia raised its benchmark interest rate a fourth time since May.  Turkey’s crisis has dragged down the currency that has already been hit by an emerging-market rout triggered by higher US interest rates and a stronger dollar.  Bank Indonesia has been the most aggressive in Asia in tightening the policy this year, raising rates by a total of 1.25 percent since mid-May.  The seven-day reverse repurchase rate was increased to 5.5 percent from 5.25 percent on Wednesday.  Governor Perry Warjiyo reiterated the central bank pledge to remain pro-active and said the move was aimed to bolster financial markets and to curb the current-account gap.  The rupiah is one of the worst performers this year, down about 7 percent against the dollar.  On Tuesday President Joko Widodo ordered import curbs to shore up foreign reserves, which have been drained by almost $14billion since January.  Current account deficit of 3 percent of gross domestic product and a relatively high foreign ownership of government bonds has made the economy vulnerable to outflows.  Government data on Wednesday showed the trade gap widened to a five-year high of $2 billion in July, putting pressure on the current account and the rupiah.  Indonesia’s economy accelerated to a five-year high of 5.3 percent last quarter.

Bond Yields

The yield premium that investors demand for holding Italian government bonds over top-rated German bonds rose to its highest since late May on Monday, as political uncertainty in Italy and a rout in emerging markets hit Italian debt.  Mixed messages from various government ministers and coalition officials have confused investors and worsened concerns about the markets over the coalition’s economic plans.  Italian bonds and stocks were also hit by the situation in Turkey.  The gap on Friday between 10 year Italian and German government bond yield widened to 275 bps up from 268 bps late on Friday and the widest since May, when a political crisis sparked a sell-off in Italian bonds.  The strain in emerging markets continued to support demand for safe-haven bonds and the German 10 year Bund Yield dipped to a one-month low at 0.31 percent.

Greece Gets An Upgrade From Fitch Ratings

Fitch Ratings, the global rating agency, upgraded the long-term foreign currency issuer default rating on Greece to BB- from B.  Last Friday Fitch said the outlook on Greece is stable and the banking sector is getting better.  It further added that the country’s relationship with its European creditors has “substantially improved.”  Fitch expects the Greek economy to grow 2 percent in 2018 and 2.3 percent in 2019.  In June, European ministers extended maturities, deferred interest of a major part of their loans to Greece and gave a big cash injection to ensure Athens can stand on its own after it exits its bailout on 20th August.  The rating agency said the completion of the final review of Greece’s European Stability Mechanism program creates a path for the country’s exit from the program later in August.  Greece has been living on borrowings from the EU, with three bailouts since 2010.  The country had lost market access amid an inefficient economy and welfare system, a huge public debt and a ballooning budget deficit.

Euro-Area Economic Growth

The economy in Europe grew faster in the second quarter than initially reported and expansion was revised up to 0.4 percent from 0.3 percent, according to Eurostat.  Growth in Germany and the Netherlands gathered pace in the second quarter keeping solid momentum, despite global trade tensions and disappointing performance of France and Italy.  The countries leading the expansion in the second quarter in the euro area were German and Dutch economies.  Domestic demand has so far shielded the region from the worst effects of protectionism, however companies are concerned about business prospects.

German Economy

The German economy picked up more pace than expected in the second quarter, amid higher household and state spending.  Despite the trade disputes with the US the economy is moving ahead.  Gross domestic product rose 0.5 percent quarter-on-quarter in April-June, according to the Federal Statistics Office.  Fears over trade war between the European Union and the US increased in the second quarter, however, these tensions were eased after the meeting between European Commission President Jean Claude Juncker and US president Donald Trump.   The government forecasts 2.3 percent economic growth this year and 2.1 percent for 2019. According to the Statistics Office, economic growth was mainly driven by higher household spending and increased state consumption and investments.  Furthermore, exports also grew, however imports outperformed, suggesting that net trade did not contribute to the overall economic growth.  The figures show a gradual shift in the economy from one based on export-oriented growth to a more domestically driven, arising from record-high employment, rising wages and booming construction.  Meanwhile inflation has remained at 2.1 percent on the year in July.

UK Retail Sales

UK retail sales bounced back strongly in July due to warmer weather and extended discounts at stores which encouraged shoppers to spend more.  According to data from the office for National Statistics in London, sales increased by 0.7 percent in July from June, and the increase was led by online sales, food and clothing. Excluding auto, fuel sales jumped 0.9 percent.  The heat wave in the UK this summer lifted spending while the soccer World Cup helped in boosting sales of food and drink.  After the data, the pound climbed 0.2 percent higher at $1.2730.

China

Beijing is looking to boost investment amid slowing economic activities and trade tensions with the US.  On Tuesday, China’s Finance Minister told local governments to speed up the issuance of special bonds which are used to fund infrastructure projects.  Special bonds are different from traditional local government bonds, as they are repaid by returns on projects instead of funds from the government.  These bonds are issued for special purposes such as highway projects.  The ministry further said that no less than 80 percent of their special bond issuance quota should be completed by end-September, adding that the rest should be sold mainly in October.  Local governments are allowed to issue 1.35 Trillian yuan of special bonds this year.  In the first six months of the year, more than 300 billion yuan of special bonds were issued, which according to the Finance Minister the pace is slow.

Home Depot

On Tuesday Home Depot which is the number one US home improvement chain reported second-quarter sales that beat Wall Street estimates. Earnings forecast for the year were revised, boosted by a rebound in demand for seasonal merchandise due to increase in shopping by shoppers.  The share price increased 25 percent in the past 12 months.  This performance comes during the time when sales of new US single-family homes fell to an eight-month low in June and data for the prior month was revised sharply lower.  The latter is an indication that the housing market was slowing down.  Company sales rebounded from the first quarter due to cooler than usual weather in some parts of the United States that hurt the demand for spring-season products.  Customer transactions rose 3.1 percent in the second quarter ended 29 July.  The retailer raised the full-year earnings forecast to $9.42 per share from $9.31.  It also now expects sales growth of about 5.3 percent from 5 percent earlier.  Net earnings increased to $3.05 per share in the quarter from $2.25 a year earlier, while analysts expected $2.84 per share.  Net sales rose 8.4 percent to $30.5 billion, beating expectations of $30.03 billion.

Barclays

Barclays has started shifting direct ownership of its French, German and Spanish branches from the British based entity to its Irish bank, ahead of Brexit.  Earlier in the month the British bank outlined its plans to investors to expand its EU-based Irish entity, stating that the unit would primarily consist of Barclays corporate, the investment and private banking activities and its Barclaycard credit card business in Germany.  While the Barclay’s European branches will still ultimately be owned by its London listing holding company, the change in organisational structure is taking place to avoid any disruptions that Brexit might cause.

Trade War And The Impact On Luxury Stocks

The escalating trade war between the United States and China could end a run in the stock for luxury goods firms.  Some investors are already put off by high valuations in the sector.  It will not be the first demand-driven wobble that the luxury industry has faced as in 2012 a Chinese crackdown on corruption caused purchases of premium cognac and other high-end goods used as gifts to fall sharply.  This time round the tariffs threaten consumer spending power in both the United States and China, which are the two biggest consumers of luxury goods that make up just over half of the industry revenues.

Commodities

Base metals tumbled and most contracts quoted in London dropped more than 2 percent.  Meanwhile copper sank below the $6,000 level, as metals nears a bearish market amid a stronger dollar and increasing concern over raw-material demand from China and other developing nations.

Malta:  The Outlook For The Maltese Economy 2018-2020

The Central Bank of Malta’s latest projections foresee the economic growth over the coming three years to remain strong from a historical perspective although at a lower but more sustainable level than 2017.  Although growth for 2018 and 2019 have been revised downwards, when compared to previous set of forecasts, growth remains high, supported by both demand and supply factors.  Energy reforms, new investment projects and increased labour supply are expected to keep potential output elevated.   Domestic demand driven by higher consumption and investment is anticipated to be the primary driver that will support economic expansion over the next three years.  The labour market is projected to remain tight, with the unemployment rate remaining low at 4.3% by 2019.  Annual inflation which is based on Harmonised Index of Consumer Prices (HICP) is projected to edge up to 1.9% by 2020, reflecting a pick-up in domestic wage pressures.

Central Bank of Malta:   Economic Update Issue 8/2018

According to the Central Bank of Malta in its latest Economic Update which is based on information available up to 8 August 2018, in July, the Bank’s Business Conditions Index (BCI) rose over the previous month and continued to suggest above average conditions.  With the exception of consumers, amongst which economic confidence remained stable at a high level, economic sentiment increased as higher confidence was recorded across all sectors.  In June, tourism activity continued to grow at a strong pace in annual terms.  Industrial production increased on a year earlier, while retail trade contracted.  Labour market conditions remained favourable, with the number of registered unemployed declining further.  The unemployment rate fell to a new historical level.  Annual inflation in June based on the Harmonised Index of Consumer Prices (HICP) rose to 2percent.  The annual rate of change of Maltese residents’ deposits eased to 4.5 percent while the annual growth in credit to residents accelerated to 3 percent.

 

Antonella Mercieca

Client Relationship Manager

Source:

Reuters, Bloomberg, https://www.centralbankmalta.org/

Date:

August 20th, 2018


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