Geopolitical risks have declined markedly, helping the TRY to remain stable, despite growth concerns prompting the central bank to cut interest rates by 425 bps. Large external financing needs and a worsening fiscal outlook present significant challenges going forward, while further stimulus could hurt external stability following last year’s sharp correction.

Weak growth will weigh on tax revenues, leading to sizable revenue shortfalls, while the frontloading of financial support to Eskom will cause spending overruns. Taken together, the fiscal deficit will far exceed the government’s targets. This increases the risk of a rating downgrade by Moody’s to non-investment grade status.

Central banks poised for easing as clouds gather over the global growth and earnings outlook; Policy uncertainty remains a key risk with no-deal Brexit and potential U.S. FX intervention in the spotlight ; China accelerates market opening for foreign investors in a bid to stoke growth and ease trade tensions; Leveraged loan issuance is over 50% below H118 levels; lower global rates reduce the appeal of floating-rate securities; Who holds leveraged loans? Institutional investors may have significant exposure via collateralized loan obligations (CLOs)    

Speculative positioning in the CFTC’s CoT report shows Dollar longs have scaled back sharply and are only modest at this point. Data from option markets suggest positioning may even be modestly short the Dollar versus the Euro. After many years of large Dollar longs in the foreign exchange market, we read these data as saying Dollar positioning is now essentially flat.

We estimate that Ukraine’s debt should stabilize at around 55%. The exchange rate depreciating roughly in line with inflation is key, as about two-thirds of Ukraine’s debt is issued in foreign currency. A 2014-style FX shock would bring the debt-to-GDP ratio to 100%. We are more concerned about the financing gap in 2020 than debt.

Please find our latest U.S. Regulatory Update, covering the Federal Reserve’s Semiannual Monetary Policy Report, Congressional Libra Hearings, Stress Testing and CCAR results, and Capitol Hill updates, among other topics.

Labor shortages and fragile investor confidence will constrain output growth. Policies will likely become more accommodative, thanks to a dovish ECB and Fed. The external financing and inflation outlook will remain challenging for some. Slow progress in addressing structural problems will intensify vulnerabilities.

The IIF has summarized key themes that emerged from the Facebook Libra hearings before both the Senate Banking Committee and the House Financial Services Committee this week in Washington.