The Three Horsemen of the Apocalypse
We could be seeing markets getting rattled from three directions this week.
First of all, the United States federal government will probably close down (literally) on Tuesday. The House of Representatives, where Republicans are the majority, did pass the bill that would fund the government, while at the same time delaying the 2010 health care law known as ObamaCare.
The president had already declared he would not accept this. When it convenes on Monday, the Senate, where Democrats are the majority, will certainly reject the bill. Then, it is negotiation time between Republicans and Democrats. Unless they miraculously come to an agreement in a few hours, the federal government will have to bring down the shutters for at least a few days.
The U.S. could certainly run without a federal government for a while. I was worried the Bureau of Labor statistics would not be able to release Friday’s non-farm payrolls, but arrangements seem to have been made for the publication of the data. There wouldn’t be huge losses for the economy, either: Analysts have calculated that shutting down the government for a month would shave off 0.3-0.4 percent of GDP.
I am more concerned about the uncertainty over the resolution of the crisis and its effect on markets as well as consumer and real sector confidence. After all, neither party has yet to show any inclination to come to an agreement. But you could choose to look at this on the bright side: This crisis has all but ruled out the Fed tapering its bond purchases in October.
Then, there is Italy: Former Prime Minister Silvio Berlusconi has done the bunga bunga again by pulling out his five ministers from the coalition government. Giorgio Napolitano, who is the country’s president and not a pizza, will respond, but probably not before Italian and European assets take a hit Monday morning.
Finally, Ukraine is on the verge of a sovereign debt restructuring/default or balance of payments crisis that would result in a major depreciation of the hryvnia, which is the name of the country’s national currency and not a character from Greek mythology.
As loyal readers would know, I am the perennial pessimist, an exemplary specimen of the dismal science. Things might work out to be fine, after all. As Winston Churchill said, “You can always count on Americans to do the right thing – after they’ve tried everything else.” The contagion from Italy and Ukraine could be limited.
If not, you should remember that the Turkish Lira is the planet’s favorite short at the moment. It has even begun to stand out among the so-called fragile five currencies. Deutsche Bank strategists recommended betting on the Indian rupee and South African rand against the lira last week. J.P. Morgan has reiterated its underweight lira position.
Unless a white horse miraculously saves the day, Turkish assets might be in for a rough week. The Central Bank of Turkey’s heavy foreign currency interventions I predicted in Friday’s column could come sooner than expected.