US/ Turkey travel visa stand-off: EM bond spreads are at their lowest in a decade - ANZ

Analysts at ANZ explained that the lira and Turkish equities each tumbled more than 3% after Turkey and the US stopped issuing visas to each other’s citizens.

Key Quotes:

"The disagreement relates to the arrest of a Turkish citizen employed at the US consulate for alleged involvement in the July 2016 failed coup against President Recep Tayyip Erdogan. Turkey and the US are uneasy NATO allies, with strong disagreement about the situation in Syria. Although the spat is quite specific, markets will be on the look-out for any signs of contagion into other emerging markets, given an increasing number of analysts suggesting that the asset class looks rather frothy at a time when global central banks are easing off the gas.

But frothiness is hardly a distinguishing feature of a global asset class at this point, and in a familiar routine, markets kept the issue firmly in its box.

Emerging market bond spreads are at their lowest in a decade and foreign holdings at record highs as investors tolerate political risk for a positive return. It seems there will need to be broader signs of trouble for global growth before (small) country-specific events have the potential to spark a risk-off event. That said, bears can point to warning signs for emerging markets: higher relative volatility, falling earnings estimates, and signs of a turn in capital flows. But no one is paying much attention as the music plays on."