Turkey trepidation lingers

Summary

Turkey is nowhere near fixed, so risk appetite is struggling to make a comeback.

Europe retreats as lira slips

European stock markets have steadily slipped into the red since the open, also leading a retreat by Wall Street futures. Prospects of a smooth and sustained recovery for emerging market currencies had looked too dicey to Asia-Pacific investors, so markets there mostly fell as well. Turkey’s lira lost all Wednesday gains at one point, following Tuesday’s bounce of more than 8%. It is now firmer again, though clearly volatile. It’s uncertain whether the rebound will be sustained. Comebacks by other currencies that fell sharply in recent days, like the rand, Russia’s rouble and Mexico’s peso, also falter.

Turkey defiant

The problem for risk appetite is that the bounce by Turkey’s lira largely reflected profits being taken. It was not due to effectiveness of the central bank’s (CBRT) piecemeal and relatively small dollar-liquidity moves. Overnight, Turkey fanned the flames of its trade and political dispute with the United States further by doubling tariffs on some U.S. imports, raising some to well over 100%. The country’s vice president cited the “principle of reciprocity” following the U.S.’s “attacks” on Turkey’s economy. Earlier, President Tayyip Erdogan announced a boycott of U.S. electronic goods. But these retaliatory moves are as unlikely to provide effective pressure on the States as CBRT measures will stabilise the lira.

Few options left

An investor call scheduled for Thursday at which Turkey’s finance minister aims to reassure investors concerned by Erdogan’s influence over monetary policy may be at the back of the minds of some lira sellers. However, aside from interest rates, market scepticism towards most options still available to Turkish policymakers is heightened. Amid double-digit inflation, attention will quickly return to Turkey’s avoidance of the inevitable once the call is over. With ingredients for potential trade escalation in place, plus questions about policymakers’ ability to face down speculators, it appears to be just a matter of time before significant volatility returns to Turkish markets. If or when that happens, European equities will again face pressure. The precise calibration of key sectors—chiefly banks—to Turkey hasn’t been quantified much.

Metals, oil heavy

Meanwhile, oil shares are bringing further bearish undercurrents to European markets after Saudi Arabia signalled an end to recent production ramps. There are signs that the dominant OPEC member sees risks of a return to oversupply. With global cyclical indicators beginning to warn in chorus that growth outside of the United States will become more uneven and slower on approach to 2019, oil demand is expected to moderate, at least. Tuesday’s unexpected build across crude oil and other energy products was unfortunately timed, even if unlikely to signify more than lumpy production. A rise in shipborne storage is also a bad harbinger though. And oil is of course under pressure partly because of dollar expense. As the greenback keeps barrelling higher, pressure on other key commodities like base metals and gold is an additional drag on Europe stocks. The STOXX basic resources index is again the sub-sector gauge that’s deepest in the red.

Dollar parade

Under the circumstances, a return to faster than expected input price inflation in the UK has certainly not been enough to rain on the dollar’s parade. With sterling already more than 100 pips lower over 24 hours, additional weight was modest. The focus thus shifts to the afternoon’s U.S. Retail Sales update for the dollar’s next potential charge. Growth is forecast to slow to 0.1% from 0.5% in July, whilst the New York Fed Manufacturing index is also expected to fall to 20 from a July reading of 22.6.