Monday, 18 July 2016
Turkey. Markets think it’s all over. It certainly is not.
The way the markets have opened up after the weekend you’d think the Turkish event hadn’t occurred. DM equity futures have unwound all the Turkey move and USD/TRY has moved back from the 3.0400 spike to 2.9600, a level it was trading at in May.
Pieces I have read from US commentators definitely carry a ‘Move along please, nothing to see here’ tone and I don’t understand why. Is it because everything really is back to normal? Or is it because it is so far away from the US and US-centric things that it is considered a 3rd rate emerging market that really can’t impact on US things? I first noticed this tone during the coup itself with the Head of Strategy at Charles Schwab saying the whole event was a fade as it wasn’t a global issue. This was said before it was known what the outcome would be and it stunned me. Was a senior US investment strategist unaware or dismissive of the importance of the stability in Turkey to maintaining stability around so many global issues? Is this lack of understanding reflected in the behavior of the bulk of US investors? Wow. How worrying, but then also; wow, this is a huge opportunity to be ahead of them in the markets.
But we know the outcome now. The coup failed and it is no surprise. It looks like one of the world’s worst organized coups and the result of it has been a dramatic increase in Erdogan’s power.
This is not a return to how the world was on Friday morning. There has been a dramatic shift in power in the Middle East and I feel a realignment of allegiances in Turkey. Already Erdogan’s rhetoric towards the US and Europe has changed leaving one wondering how other (Russian) influences are gaining a foothold in the country. This is a NATO country so there is only so far one could imagine that going, but the situation is still of concern. The US reaction to the coup needs close examination and silences will be as telling as words. The US have Gulen and Turkey has Incerlik.
As for Turkey itself, the deputy PM, Simsek ,may well have had his longest phone call today spending 2:15hrs talking to investors to placate them. It seems to have worked with what I have read so far tonight from sell-side banks reflecting that message. ‘It’s over, fade it”. No. Think of it more simply than that. You were invested in Turkey thinking that it was a nice general EM recovery and yield play in line with the general mood. Or you were thinking of a long term investment in infrastructure there. Would you be as happy to do so now as you were last week? To the ADHD short-term traders, it may be easy to pack up your trading bags and move on, but this is a slow burner.
If you get notes from your sell-side counterparts telling you that Turkey is not an issue and that everything is as wonderful as it was on Friday morning, if not better, use them to light your barbecue.
I have bought USD/TRY at 2.9600 and am still short of DM equities. I have even added to my US equity shorts on this bounce as it appears that the US markets don’t get it as much as I feel they should. If you wish to accuse me of taking my book then go ahead. I am hardly likely to be positioned one way and think the other. That would be plain stupid.