The Weekly Update

Another rollercoaster week saw OPEC discuss the possibility of a production freeze. For the first time in eight years, the cartel announced that members had reached an “agreement” to marginally cut crude production, in an attempt to temper the supply glut and stabilise oil prices. Markets reacted positively to the news, despite no fundamental changes or a concrete deal; which is due to be ratified at the OPEC meeting in November. Nonetheless, Brent enjoyed a ~8% rally over the week, closing above $50pb. Concerns over European banks’ capital levels and the consequent contagion effects saw markets end the week on risk-off tone. Major asset classes remained relatively flat over the week, having rallied after the OPEC news and the Clinton 1:0 “win” against Trump after the first presidential debate.

Elsewhere, as was widely expected, rating agency Moody’s downgraded Turkey’s Baa3 long-term rating by one notch to junk Ba1, citing 'The increase in the risks related to the country’s sizeable external funding requirements' and 'the weakening in previously supportive credit fundamentals particularly growth and institutional strength' as the main drivers for the downgrade. Moody's also highlighted the country’s susceptibility to event risk as ‘high’ adding its concerns over the country’s vulnerability to political instability and geopolitical risks emanating from ‘Syria’s ongoing civil war and the crisis in Iraq.’ After the failed coup in July, Standard and Poor’s swiftly downgraded the country’s rating to BB, however Moody's said it would take time to review the situation later stating, ‘The risk of a sudden disruptive reversal on foreign capital flows, a more rapid fall in reserves and, in a worst-case scenario, a balance of payments crisis has increased”. Fitch is the only major rating agency to maintain an investment grade rating on the country; at BBB-.

Although a very popular holding amongst emerging market indices, we have never held Turkish debt, the main reason being that the country has a Stratton Street NFA score of only 2 stars; thus not within our investable universe. Also using our Relative Value Model, we calculate that the benchmark government curve is already pricing in a number of downgrades and is therefore trading fairly close to fair value, with the most attractive point of the curve at 5-years. The 5.625% 2026 offers a small 2.5% expected return and only 1.5 notches of credit cushion; we would much rather invest in 7 star, Aa2/AA rated sovereign paper like Qatar 9.75% 2030s which offers an expected return of around 11%, and has 5.5 notches of protection.

On Saturday, October 1, the Chinese renminbi was included in the IMF’s Special Drawing Rights (SDR) basket as a reserve currency. We expect the PBoC will look to maintain currency stability, with little flow expected this week as the country celebrates Golden Week. Last week’s data releases showed China’s PMI data was stable in September; both the official and Caixin manufacturing readings remained in expansionary territory, while the non-manufacturing print improved to 53.7.

This week, market focus will likely remain on the European banking crisis, especially after the hard line the German government has taken with regard to strictly no bailouts.  Elsewhere there will be a number of Fed members due to speak, and some focus on UK PM May’s Conservative Party conference, after her comments over the weekend regarding triggering Article 50 in Q1 ‘17. At the end of the week we have the all important US non-farm payroll reading; consensus is for an additional 170k jobs and for unemployment to stick at 4.9%.

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