Stocks in bullish consolidation
Continuing the recent trend, the markets have remained in a relatively tight range, after Wall Street ended lower for the second straight day on Wednesday, which basically reversed a two-day rally. So, while it may look like equity investors are more concerned about the new lockdown measures to stop the spread of the coronavirus than they are hopeful about prospects for a vaccine, let’s not forget that this consolidation comes on the back of a sizeable two-week rally, especially for value stocks. As the major indices remain near their recent highs, this recent price action could therefore be regarded as bullish consolidation, rather than a bearish reversal.
The hesitation to break further higher for the major indices makes some sense. Clearly, some investors were happy to take profit and re-assess the situation after the first announcement of the effective vaccine development from Pfizer and BioNTech gave the markets a big shot in the arm. The subsequent updates from Moderna on Monday and today from Oxford, whose vaccine candidate showed a strong immune response in old adults, have added to the optimism we are heading to more normal times ahead, keeping the bears at bay. It is quite possible therefore that the rally could soon resume, especially for the lagging European markets as more and more investors become convinced that the lockdowns will soon be over.
As the vaccine race continues, the need to develop and approve one cannot come soon enough, with the hospitalizations in the US and elsewhere continuing to rise along infections.
Turkish delight for lira as new CBRT head hikes rates sharply
As widely expected, Turkey's central bank hiked interest rates by a huge 475 basis points to 15% earlier today under the leadership of the newly appointed governor, Naci Agbal
. The lira, which had been rising in anticipation of the hike, extended its gains further by about 2% against major currencies. The lira has become one of the best performing currencies among emerging market peers over the past couple of weeks, after being the weakest for several months.
The lira hit a new all-time low a few weeks ago after the CBRT kept policy unchanged instead of raising rates to dampen surging inflation. Erdogan has long been an advocate of low rates, but after the nation’s currency kept plunging to record lows, inflation rose to uncomfortable levels and the economy suffered, he finally succumbed to pressure to change tack. He replaced his son-in-law Berat Albayrak by Lutfi Elvan as the new Finance Minister and got rid of the former central bank governor and replaced him by Mr Agbal, who today decided to hike borrowing costs sharply. Erdogan has said that he will stand by the actions of the new finance minister and central bank governor “in every step they take,” although just yesterday he again re-iterated how much he hates high interest rates.
EUR/TRY could drop big amid widening rate differential
As interest rates in Turkey are one of the highest in the world, traders are piling into the lira to take advantage of the comparatively higher returns. Turkish assets could rise further in value if the new central bank governor and finance minister can hopefully dampen inflation and bring back credibility. The TRY could find tailwind support from news of the vaccines which has helped to lift the mood towards all risk assets, including emerging market currencies.
With the European Central Bank President, Christine Lagarde, promising to deliver a big monetary stimulus package in December the interest rate differential between Turkey and Europe could widen further. Thus, the EUR/TRY could be the one to watch for further downside potential as investors warm towards the lira and other Turkish assets.
Source: ThinkMarkets and TradingView.com