Turkish markets in a good mood in the early days of 2018
Global financial developments are continuing on a positive trend for developing countries like Turkey. It is not clear how long this will go on, but the markets seem quite happy in the first month of the New Year.
We entered the New Year with only small fluctuations and it looks like this calm trend will continue for a while. The gains in the euro came to a halt and the value of the dollar started to rise again in international markets on Jan. 8, but generally the fluctuations continue only at small margins.
Considering the rise in the dollar against the lira last year, the current 3.74-3.75 liras to $1 rate has boosted the morale of markets. Foreign currencies continue to flow into Turkey as well as other developing countries.
The U.S. Federal Reserve is expected to raise interest rates in 2018. But there are still some contradictory statements coming from Fed officials about whether there will be two or three hikes, or maybe even more if growth and inflation expectations are not met.
So the markets are happy because the flow of hot money is continuing into Turkey, which is doubly attractive because of current of interest rate levels. This flow not only provides profit opportunities, it also gives positive signals in terms of a stable trend in macro balances.
Even though growth figures have lost a bit of momentum, growth continues in Turkey. Industrial production figures announced on Jan. 8 fell within the estimates of the market, increasing by 0.3 percent in November 2017 on a monthly basis and 7 percent on a yearly basis.
Few people are talking about the widening foreign trade deficit and the current account deficit, but there is a lot of talk about the rise in exports.
So in short markets are in a positive mood, with global developments and domestic inputs supporting this mood. This being the case, it will take a serious accumulation of bad news for markets to lose this mood. In the absence of bad economic news, the dominant projection is for the flow of money to continue in the first half of the year.
But possible clouds on the horizon could come from the U.S. Eyes are therefore on several institutions.
The outcome of the Reza Zarrab case on Iranian sanctions busting in New York tops the agenda, along with whether there will be any new related cases. Following the recent guilty verdict against former state lender Halkbank manager Atilla Hakan, the U.S. Treasury is widely expected to fine a number of Turkish banks for violating U.S. sanctions on Iran.
It is not clear how many banks will be fined. But if the fines are limited to around $2-3 billion, the dominant view in the markets is that this will not have much effect. Of course, the story will be different if Turkey opts not to pay the fines.
Equally dangerous developments could come from the direction of the U.S. Congress. There are rumors about an intention in Congress to apply serious sanctions against Turkey, and Ankara is reportedly already planning certain moves in anticipation. There is also talk about sanctions over Turkey’s decision to purchase S-400 missile defense systems from Russia, prompting intense speculation in the political corridors about the possibility of certain institutions and companies also facing sanctions.
In sum, the continuation of the current positive mood in the markets in Turkey will depend on various political decisions in the coming period.