Trade the range
Market sat through a directionless market as no real issues took center stage. Global equities were mixed as movement was based on idiosyncratic events. Overall there remains a slightly bias to be risk off. As the list of issues that would damage global demand and investment confidence has only grown longer. However, the lack of direction indicates unfamiliar uncertainty which does not translate to core measures. Example we view the likelihood of US President Trump to start a Trade War or become China BFF as nearly balanced. Yet the end result would have extremely different outcomes. VIX index remain close to lows reflecting unconcern. While despite marginal slowing in domestic manufacturing indicators globally the situation remains healthy.
Another example of near binary outcome is clearly Brexit. With only week away before first arbitrary deadline and total chaos in UK politics sterling assets are balanced. We suspect that in FX playing the short term range remains the dominate strategy over picking a clear direction. USD advance seems tired as Trumps fiscal boost, IMM longs are stretched (only slightly of highs) and dark clouds over midterms should generate considerable headwinds. Yet Europe is not helping investors focusing on positive as ECB governing council Rehn raised concern over Italy’s budget deficit. Crude oil is providing the onlz real direction lifting commodity linked FX and stocks. With US drillers coming off line, distillate exports near 2 year lows and Iran production coming off line the prospect for $90 brl looks promising.
Turkish inflation rises to record levels
The Turkish lira took another hit on Wednesday amid disappointing inflation figures. Headline inflation measure broke another record in September as it climbed to 24.52%y/y, beating widely market’s estimate of 21.10% and up from 17.90% in August. The core measure does not give more cause for optimism as it surged 24.05%y/y compared to forecast of 19.31% and 17.22% in the previous month. USD/TRY rose as much as much as 1.80% to 6.0969 following the announcement, before easing to 6.0440.
The Central Bank of Turkey already increased the one-week repo rate by 16% this May this but it looks like further hike are coming down the pipeline. Indeed, after finally getting along with market expectations and raising interest rate, the CBRT has no choice but to keep moving in the same direction. A step back would be devastating for the lira, as it would destroy investors’ trust, which is still very fragile. The next central bank meeting is scheduled for October 25. In the meantime, and assuming that Erdogan takes the backseat, the lira should continue to trim losses slowly.
