Turkey, Emerging Market Central Banks, Eurozone Divergence

Attention today is on developments in Turkey. Despite consensus expectations of a 100bp (1%) hike in rates, Turkey’s central bank delivered a bigger than expected 200bp increase last week, with a hawkish statement.  This appears not have been welcomed by Turkish President Erdogan who promptly removed central bank (CBRT) Governor Aqbal on Saturday.  Despite some reassurance from Aqbal’s replacement that policy would deliver price stability the result has been substantial pressure on Turkey’s currency the lira (TRY) at the start of trading in Asia today, with the lira down as much as 15% initially, erasing more than four months of gains.  Turkish authorities are likely to intervene to limit the damage, but the damage has been done.  There has also been some, albeit more limited fall out on other emerging market currencies.

The end of the week saw a bit of a reversal in recent trends, with tech stocks gaining most, at the expense of bank stocks, which were weighed down by the news that the US Federal Reserve would not extend the Supplementary Leverage Ratio (SLR) exemption but rather to look at a more permanent solution. This could lower banks demand for Treasuries while constraining dealer balance sheets. Both S&P 500 and Nasdaq recorded declines over the week amid a further rise in US Treasury yields.  Quadruple witching saw an increase in volumes and oil prices recorded a sharp close to 8% decline over the week while Chinese stocks continued to suffer. 

Aside from Turkey there was some interesting central bank action last week in the emerging markets.  The BCB in Brazil hiked by 75bps, more expected, and indicated the high likelihood of another 75bps at the May meeting.  The CBR in Russia also joined in on the hawkish emerging markets (EM) action surprising markets by hiking rates by 25bps, with a likely acceleration in tightening likely over coming meetings.  EM central bank decisions this week include China (today), Philippines (Thu), Thailand (Wed), Hungary (Tue), South Africa (Thu), Mexico (Fri) and Colombia (Fri).   Separately, the SNB in Switzerland also decides on policy (Thu). China’s loan prime rates were left unchanged as expected and no changes are likely from any of the other central banks this week. 

Other data and events this week include the US PCE report (Fri), President Biden’s press conference (Thu) which could offer clues to the “Rescue” package that could amount to $3-4trn. A host of Fed speakers are also on tap, including Fed Chair Powell, as well as Eurozone flash purchasing managers indices (PMIs) (Wed), and UK retail sales (Fri).  The data will reveal stark differences in the recovery picture in the UK and Eurozone while the difference between the US and Europe looks even more stark.  Europe is struggling with a third wave of Covid case, vaccination delays and tighter restrictions, leading to a reduction in growth forecasts, while US growth forecasts are being revised higher in the wake of the $1.9tn stimulus package. This will likely result in some underperformance of Eurozone markets relative to the US.  

Positive Start To The Week for Emerging Markets

Emerging Markets have started the week on a positive footing helped by some firm data releases.  Equity markets in Asia had a strong day while EM currencies except TRY strengthened.

Sentiment was helped by China’s official manufacturing purchasing managers index (PMI). This was released yesterday and came in at 50.5 in March (consensus 49.6) from 49.2 in February, while the non-manufacturing PMI also came in above expectations at 54.8 (consensus 54.4) from 54.3 in February.  An above 50 reading implies manufacturing expansion. This was followed by the Caixin PMI this morning, which came in at 50.8 in March (consensus 50.0).  The data suggests that China’s economy may finally be benefiting from official stimulus measures as well as hopes of a trade deal.

Aside from China’s index, PMIs across the region generally firmed, providing some relief to regional policy makers and markets.  A key event this week in the region is India’s Reserve Bank (RBI) meeting to decide monetary policy on Thursday, where a 25bp policy rate cut is likely.  Separately, attention will remain on US- China trade talks, with China’s top economic official Liu He due in Washington to continue discussions with US officials.  Both sides appear to suggest a deal is moving closer to fruition although sticky points on structural issues remain in place.

Turkey hasn’t quite embraced the risk on tone following local elections there. President Erdogan’s AKP appears to have lost control of the capital Ankara to the main opposition CHP, while opposition parties are also likely to take control of several coastal cities. In Istanbul, the gap between the AKP and opposition is extremely close, with less than 0.1% between the two.  Overall, the AKP led alliance has garnered about 51.7% of the national vote, while the opposition led by CHP, has 37.5%, with 98.9% of the votes counted, according to the state-run Anadolu agency. This was sufficient for the Erdogan to declare that the ruling party “emerged as the winner” though it is clear that AKP’s coalition party MHP played a large role.   Further developments are awaited, with Turkish markets in limbo.

 

Turkey hikes, ECB and BoE don’t. Trump dampens trade hopes

Despite comments from Turkish President Erdogan railing against prospects for a rate hike, Turkey’s central bank, CBRT hiked the repo rate to 24%, a much bigger than expected 625bp increase.  This may not be sufficient to turn things round sustainably but will at least prevent a return of the extreme volatility seen over past weeks.  The decision saw USDTRY drop by about 6% before reversing some of the move.  Undoubtedly the decision will provide support to EM assets globally including in Asia today.

Elsewhere the European Central Bank (ECB) delivered few punches by leaving policy unchanged and reaffirming that its quantitative easing will reduce to EUR 15bn per month (from EUR 30bn) from October while anticipating an end after December 2018.   The ECB also downgraded its growth outlook but kept the risks broadly balanced.  The outcome will likely to help put a floor under the EUR.  Unsurprisingly the Bank of England (BoE) left its policy on hold voting unanimously to do so, leaving little inspiration to GBP.

President Trump poured cold water on US-China trade talks by denying a Wall Street Journal article that he faces rising political pressure to agree a deal with China.  Trump tweeted, “They are under pressure to make a deal with us. If we meet, we meet?” . Meanwhile US CPI missed expectations at 0.2% m/m, 2.7% y/y in August, an outcome consistent with gradual rate hikes ahead.   The data will also help to undermine the USD in the short term.

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