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20 I Companies & Markets bne October 2019
The market correctly anticipated the 10bp rate cut from the ECB, but had estimated the bond purchasing would be set at €30bn per month.
Following the ECB announcement, the euro started fetching less than USD1.10 for the first time since April 2017.
Focus on the Fed
The global monetary policy environment has turned benign for the lira in recent months and Ankara will be hoping for another move that plays to its advantage.
Following the Turkish central bank’s rate cut announcement, the USD/TRY rate fell into the 5.65s in the course of just a few minutes, descending from the 5.75s. The local currency was trading at 5.6599 against the dollar at around 23:20 Istanbul time, stronger by 1.54% d/d.
The Borsa Istanbul’s benchmark BIST-100 index tested 103,000 while Reuters reported that Turkey’s eurobonds made solid gains.
The reactions on Turkish eurobond markets, when held up against the 5-year credit default swaps (CDS) curve, to ‘Erdo- ganomics’ have been eye-catching of late. Observers will be watching even more closely to ascertain whether the govern- ment’s control and manipulation of the markets is expanding.
Yields on domestic benchmark 2-year and 10-year bonds are now below 15%. Foreigners held only 12% of the Turkish gov- ernment’s domestic government bonds stock as of September 6, according to the latest data from the central bank.
It’s a stretch
The lira’s odd reactions to the dramatic rate cuts continue to stretch the reasoning skills of market commentators.
Adam Samson of the Financial Times delved into the mixed and rather muddled expectations, asking “Why is the lira rallying?”
Samson quoted Paul McNamara of GAM as pointing out that there had been "a lot of talk" among investors that there would be an even deeper rate cut of around 400 bp. He also quoted Erik Mayersson of Handelsbanken as saying that the reduction was "more than expected by forecast economists (including myself), less than expected by investors".
“If the central bank is mindful of market expectations,
the pace of easing is likely to slow down as the policy rate approaches a level which is tolerated by investors,” Piotr Matys of Rabobank told Bloomberg.
“Though 325bp is a bit above [the expectations], it’s nothing too dramatic,” an unnamed emerging markets portfolio man- ager told Global Capital.
The references made to anonymous “investors” in analysts’ notes are nothing unusual, but they do beg the question of who exactly is investing in the Turkish lira right now.
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Latest data from the central bank showed on September
12 that foreigners’ net sales of domestic government bonds amounted to $25mn in the week to September 6, while their net sales in domestic repos amounted to $69mn.
Foreigners’ net sales of domestic government bonds have amounted to $313mn since August 9.
There was an inflow of $111mn into Borsa Istanbul in the week ending September 6 but total outflows since July 26 have amounted to $442mn.
So far this year, foreigners’ net purchases of Turkish equities have amounted to $540mn while their net sales in domestic government bonds stood at $2.26bn and $147mn in domestic corporate bonds, suggesting a total portfolio outflow of $1.86bn.
FX deposits at record high
The central bank data also showed that Turkish real persons’ FX deposits at local lenders rose to a fresh record high of $117.7bn as of September 6 from $117.1bn a week earlier.
The positive thing here for officials is that Turks are not pulling their savings from the system, a course of action that would trigger a dramatic economic collapse and certainly bans on FX deposit withdrawals. It’s wise to remember that those FX deposits are just bank records. There is no such thing as
so many dollars at the local lenders because the central bank sells reserve requirements via public lenders to keep the lira under control.
On the price development front, analysts say Turkey’s official inflation rate is all set to fall into the single digits in September from August’s 15.01% because of the base effect. That will then be reversed in November. However, the magical power
of Erdoganomics could prove them wrong all over again.
Bye-bye economic history
One surprise that seems nailed on for the near future is growth figures that will defeat all lessons anyone thinks they’ve taken on board from economic history.
Erdogan’s son-in-law and finance minister Berat Albayrak said during this week’s European Bank for Reconstruction and Development (EBRD) celebration of 10 years on the Turkish market that he believed Turkey’s economy would post positive annual growth for 2019.
Both the consumer and producer price inflation figures would fall into the single digits in September while the current account would post a record surplus for July, Albayrak added.
Albayrak’s official figures are pretty swell, albeit not logical, but the rumour mill keeps churning on whether his father-in- law will fire him or he will manage to cling on.
Albayrak had not been seen in the media for a while.