The lose-lose dilemma of opting for growth-chocking rate hikes or inflation-stoking rate cuts continue to cause turmoil for Turkey and its currency. Indeed, the biggest news from the weekend was from Turkey where the shock dismissal of the CBRT’s head intensified concerns over a full-blown currency crisis. The Turkish lira slumped about 17% against the US dollar at the Asian open before some of the gap was filled. The USD/TRY was still down about 10% at the time of writing, as investors pondered over President Recep Tayyip Erdogan’s decision to remove Naci Agbal, who just 4 months ago had become the country’s third central bank chief in less than two years. It looks like the 200-basis-point rise in interest rates to 19% on Thursday were one too many. But with the appointment Sahap Kavcioglu, Turkey’s central bank now has a leader who is known to be a critic of interest rate increases. It will be interesting to see how Turkey’s monetary policy will be managed under his leadership and how the Turkish Lira will respond. The markets are demanding a tighter monetary policy to stem rising inflationary pressures and a slumping currency. However, it looks like the recent rate hikes will be reversed and that could not only stoke inflationary concerns but potentially cause actual acceleration in inflation. Keep an eye on USD/TRY as it could start trending up again after filling most of its overnight gap:
Source: ThinkMarkets and TradingView.com
Quie-tish start elsewhere as yields ease
Meanwhile, it has been a quiet-ish start to the week elsewhere, after a volatile last week for stocks and crude oil. Sentiment turned a little sour towards risk assets from around mid-last week. US stocks sold off Thursday, led by the technology sector, after the Fed failed to stem rising bond yields. Yet, the fact the Fed and other central banks re-iterated that monetary support will not be removed any time soon kept the downside limited and equity markets attempted a rebound on Friday, leading to a mixed close. Yields have eased from recent highs, helping to alleviate some of the downside pressure for stocks on Monday morning. Meanwhile, crude oil was stable after a sharp drop last week when concerns over the pace of vaccinations in Europe and rising US stockpiles reduced some of the optimism over demand.
Looking Ahead
Looking forward to the week ahead, there will be plenty of speeches from central bank officials, most notably those of the Federal Reserve. The fact that this week’s plethora of central bank meetings failed to derail the rally in bond yields means inflation concerns might provide cause for concern again. Meanwhile tensions between the US and China are rising again with heated exchanges at the sides’ first meeting under the Biden administration. It will also be interesting to see whether the stronger dollar will hurt buck-denominated commodities and emerging market currencies again. Elsewhere, although Greece has reduced some Covid restrictions, the German health minister on Friday said that the rising infections could mean that they might not be able to relax restrictions in the coming weeks. This could weigh on the euro, already under pressure because of the Eurozone’s slow progress on the vaccines front.
So, there are plenty of reasons why the appetite for risk is going to be low you would think. Yet, given the central banks’ desire to provide as much support for as long as needed in spite of inflationary concerns could keep the potential weakness for stocks and other risk assets limited. As a result, we might see lots of chop and churn in the coming days as investors weigh the prospects of faster economic recovery against rising inflation concerns.
What have we learned from plethora of central bank meetings?
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US Federal Reserve’s promise to keep the printing machine going at full throttle and keep rates low until it is confident that the economic recovery is on a sustainable path failed to ease investor nerves about rising borrowing costs. US bond yields hit new highs on the year and the dollar rallied as a result, causing tech stocks to drop and weighed on some buck-denominated assets like crude oil. Watch out for further gains for US yields, as this could negatively impact the relatively lower-yielding growth stocks and buck-denominated metals in the weeks ahead. However, if yields were to reverse then that should provide a positive backdrop for these markets. Fed’s Powell was at it again on Friday, saying the central bank is committed to using all of its policy tool to promote recovery and that it will keep supporting economy ‘for as long as it takes’.
Source: ThinkMarkets and TradingView.com
With the Fed saying they will keep monetary policy loose and won’t raise interest rates despite rising inflationary pressures and given the recently-passed $1.9 trillion US stimulus package just as major economies are about to go come out of lockdowns, speculation about inflation is going to keep those bond yields supported. So, keep a close eye on yields in the weeks ahead and If they were to rise alarmingly fast, then investors will probably get worried about tighter monetary conditions, which should be particularly bad for stocks of high-flying growth and technology stocks, as it makes their future cash flows less worthy. Gold is also likely to remain on the receiving end of rising borrowing costs. The opportunity cost of holding the non-interest-bearing metal rises when yields on government debt rises. Investors would question holding onto something which costs money to store when they can invest in government bonds that pay some interest in return. However, if bond yields unexpectedly drop in the week ahead, then gold could find some unexpected support.
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Bank of England was also quite dovish even as the UK is miles ahead of its European neighbours in the vaccine race, with a record 660K doses having been administered in one day on Thursday. Here, lockdowns are slowly going to be lifted, with schools having already re-opened earlier this month. The pound is thus likely to recover against currencies where the central bank is even more dovish than the BoE, in the upcoming weeks. However, as the BoE was actually more dovish on the future path of interest rates than expected, there is a risk sterling could drop further in the short-term. That said, there are clearly much weaker currencies out there which the bears could speculate on rather than sterling. There are also plenty of UK macro data in the week ahead, and we could see the pound become sensitive to data again.
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Bank of Japan decided to allow more flexibility in the 10-year bond yields and said that it will buy Japanese stocks more aggressively only during periods of market turmoil up to a maximum of ¥12 trillion a year rather than at a steady pace of an average of ¥6 trillion per year. The 10-year bond yields will be pegged at “around zero” but they will be allowed to fluctuate by plus or minus 0.25%, up from 0.2% previously. The BoJ’s policy review introduced only cosmetic changes to how it is conducting business, but it suggests the central bank is slowly moving away from the era of massive monetary stimulus it had launched 8 years ago, even if that 2% inflation target remains elusive. So, in the weeks ahead, we may see Japanese yields rise to 0.25% and thereby cause the yen to strengthen. Keep an eye on the 10-year JGB yield:
Source: ThinkMarkets and TradingView.com
Macro calendar highlights
The week ahead features a handful of potentially market-moving data, as well as several speeches from central bank officials and the Swiss National Bank’s turn to decide on monetary policy. Here is what’s in store in the week ahead:
Monday: Speeches from Fed Chair Powell and FOMC members Barkin, Daly, Quarles and Bowman
Tuesday: