Financial markets are selloff sharply on the back of baseless chatter suggesting that the Federal Reserve will announce tapering of stimulus as early as next week. Bonds are falling, yields are at highest level in over 16 months; European and US equities are on the slide, with the FTSE100 and the DJIA both down over 100 points. FX pairs getting burnt too while credit spreads widen. This chatter is being taken with a pinch of salt but it does highlight the deep fear in the market of a surprise announcement of tapering. Judging by the mixed signals we have had form the US [patchy economic data] and yesterday’s optimistic tone from S&P to upgrade the US’s outlook to stable, traders are as uncertain as ever over when the Fed will taper stimulus. Next Wednesday’s Fed statement will most definitely be stealing the show; expect bouts of volatility until then. Fed tapering fears are not the only thing that have the markets’ goat. The BOJ holding fire on adding more stimulus rattled nerves given the recent turbulence in the Japanese markets [bonds, equities and the yen] and in Europe, the ECB’s bond buying programme, the inactive OMT, is under scrutiny by German lawmakers who are currently questioning the programme’s legality. Jens Weidmann of the Bundesbank is a known critic of the OMT so the stage is set and investors are worried that any ruling by Germany could lead to restrictions and parameters placed on the programme. ECB chief Mario Draghi will have the difficult task to defend the OMT – he said on Monday that just the existence of the facility has been responsible for easing worries about the fate of the euro zone. On Greece briefly, the ASE posted its second day of losses after failing to get rid of state-owned gas monopoly Depa on Monday. It was seen as a setback for Greece who are looking to sell a host of big ticket assets in order to meet their EU mandated privatization target for the year-end. Greece has now had to ask the Troika for more time to shed assets according to PM Samaras. If the country cannot persuade the troika for some slack on meetings its target, we are in for a flare-up of the Greek debt drama as Samaras’ government will have to implement deeper austerity cuts. Finally, despite an escalation of tensions in Taksim Square today, Turkey’s stock market and lira have been supported by GDP coming in better than expected, driven by domestic demand. The GDP figures showed an encouraging turnaround after a turbulent 2012. That said, longer term profile is tarnished in light of the recent tensions which have unnerved foreign investors, making it difficult for the country to gain inflows. This is particularly worrying given the potential Fed unwinding of asset purchases in forthcoming months which will reduce liquidity in the global market. Emerging markets such as Turkey have been big beneficiaries of easy Fed money so a reduction of that will further dent capital inflows into Turkey. Furthermore, asset allocators are betting on a US economic recovery and an end to the euro zone recession by the end of the year; that will lead to flows into developed markets [equities exposed to US recovery] out of emerging markets. So as an investment case, although the Turkish central bank has supported the Lira with tightening monetary conditions and will continue to do so, the political uncertainty raises the spectre of credit rating downgrades. This all puts a downside threat on GDP forecasts for 2013. The lira and Borsa Istanbul may have found support on the strong GDP figures today, but Turkish credit-default-swaps are telling a different story; Turkish CDS spread reach its highest level since July 2012. ________________________________________ Ishaq Siddiqi Market Strategist
Posted on: Tue, 11 Jun 2013 13:53:34 +0000
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