As the investing world waits with baited breath for the outcome of the Turkish Central Bank's emergency meeting (released at 2200GMT) to see if they hike rates 300, 400, or 500bps and finally manage to persuade Erdogan that raising rates are essential; the Turkish stock market investors are voting (and selling). The Istanbul 100 index has plunged to its lowest level since July 2012 (and the Lira strength from spike lows has stabilized - just two days shy of record lows).
A story that won't go away: The German central bank 'proposing' an emergency "capital levy" in "conditions of extraordinary national crisis."
The depressed tone overnight following AAPL's disappointing earnings mysteriously evaporated just ahead of the European open, when around 2 am Eastern the all important USDJPY began an dramatic ramp, (with ES following just behind) which saw it rise from the Monday closing level of 102.600 all the way to 103.250, in what appears to have been a new frame-setting stop hunt ahead of a variety of news including the start of the January - Bernanke's last - FOMC meeting. One of the potential triggers for the move may have been the RBI's unexpected hike in the repurchase rate to 8.00% with an unchanged 7.75% consensus, which was its second consecutive INR-boosting "surprise." Among the amusing comments by RBI's Rajan, justifying the ongoing (loising) fight with inflation, was that India's consumer numbers are weak because of inflation. But... isn't that the Keynesian cargo cult's wet dream?
With emerging markets in panic mode, investors are bound to be reminded of the enduring observation, first made by a 19th century British businessman named John Mills, that: “Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal in hopelessly unproductive works.” With that in mind, investors seem happy to link the ongoing emerging market sell-off to either a) China’s large capital misallocation triggered by the 2008-11 credit boom or b) the Federal Reserve’s promise to start tapering last May, followed up now by the real thing. But could there perhaps be another explanation?
As we noted earlier, the "surprise" factor of the Turkish Central Bank's (CBT) emergency meeting is seeming to have the desired effect as the Lira has rallied over 1000 pips since the announcement. Officially there has been no intervention and, despite Erdogan's political pressure on the CBT not to raise rates (because of the "interest rates lobby"), Barclays (as we noted here) and most other banks are expecting more conventional dramatic interest rate hikes (since everyone knows the FX reserves are running dry):
*TURKEY NEEDS TO RAISE O/N RATE 300BPS FOR MKT EFFECT: JPMORGAN
However, JPMorgan adds that it "strongly doubts this will regain investors confidence" and Finansbank warns it has "significant doubts" that the CBT will deliver. And this is what the rest of the market thinks...
This week, much of the market focus will remain on the policymakers' responses to the challenges emerging out of the, well, emerging markets. In particular, the response of the Turkish Central bank will be key. This week we also have eight MPC meetings, with the US FOMC on Wednesday standing out. Consensus expects the continuation of the tapering of asset purchases – by another USD10bn, split equally between Treasuries and MBS. Other than that, the announcement should be fairly uneventful. In India GS forecasts an out-of-consensus hike of the repo rate to 8.00% after the central bank published a report on suggested changes to the monetary policy framework. In New Zealand, South Africa, Israel, Mexico, Malaysia and Colombia, consensus expects no change in the monetary policy stance. Among economic data releases, the focus will be on consumer surveys, as well as business surveys (US, Germany and Italy). There are also inflation numbers from the US, Euro Area, Japan and Brazil. Advanced Q4 GDP data prints will come out for the US and the UK. US consumption and production numbers are due at the end of the week.
The last time the Turkish Central Bank announced, after the fact, it has failed to intervene decisevely in FX markets, the country's currency collapse became a vivid example of what happens when monetary collapse looms and the monetary authority is unable to do anything about it. This morning, things got even more surreal after the Turkish lira cratered from 2.32 to a record low against the dollar, just shy of 2.39, when at 5:30 Eastern time, the Turkish CB decided to do what Draghi, Bernanke et al are so good at doing: threaten with some unknown future action, in the process spooking everyone into covering shorts, when it unexpectedly announced it would meet on 28 January 2014, Tuesday evening to discuss recent developments and take the necessary policy measures for price stability. The decision would be announced at midnight. A fitting hour for yet another central bank bailout...
Selling hope, after all, is the stock and trade of the Sell Side. But we all need to take a step back and ask ourselves just where we stand on the proverbial economic timeline...
FX markets featured significant volatility in the past week, though the driver of that volatility was a combination of several idiosyncratic factors, rather than a core underlying narrative. Widespread risk aversion and position unwinds dominated market trading with China PMI, weak US earnings, and BoJ un-dovishness cited among more systemic factors. Turkey and Argentina (among others) have more idiosyncratic risks (and limits approaching) but as Barclays notes, market positioning has played a major role in the moves as market volatility appears to have been the straw that broke the carry-trade's back - for now... as EM currency returns have notably decoupled from moves in US rates.
Overview of forces impacting stocks, bonds and currencies.
The concept of the "Fed Put" is about to be tested.
China’s GDP will almost certainly soon surpass America’s in absolute terms. The end of the unipolar era will create new dangers that the world mustn’t overlook. China’s relative rise and the United States’ relative decline carries significant risks, for the rest of the world probably more so than for Americans. Odds are, the world will be worse off if China and especially others reach parity with the U.S. in the coming years. This isn’t to say America is necessarily as benign a hegemon as some in the U.S. claim it to be. Regardless of your opinion on U.S. global leadership over the last two decades, however, there is good reason to fear its relative decline compared with China and other emerging nations. To begin with, hegemonic transition periods have historically been the most destabilizing eras in history.
In the last year Bitcoin has gone 'viral'. As ConvergEx's Nick Colas notes, a lot has happened in 2013: Price appreciation, yes, from $20 to +$800 – the result of this online “Currency” going from science project to mainstream topic. Volatility too – disruptive technologies seldom travel a level path. The story, Colas notes, is about to change, and there are three critical gates which bitcoin must navigate in the New Year. First is regulation, and we will get a good dose of that next Tuesday and Wednesday when the New York State Department of Financial Services holds hearings on bitcoin and potentially issuing a ‘Bitlicense’ to help regulate business which transact in the currency. Second is adoption – how will existing businesses incorporate bitcoin into their sales, marketing and payment channels. Lastly will be volatility, which will have to come down in 2014 to encourage broader use.
Have you been paying attention to what has been happening in Argentina, Venezuela, Brazil, Ukraine, Turkey and China? If you are like most Americans, you have not been. Most Americans don't seem to really care too much about what is happening in the rest of the world, but they should. In major cities all over the globe right now, there is looting, violence, shortages of basic supplies, and runs on the banks. We are not at a "global crisis" stage yet, but things are getting worse with each passing day. Many have felt that 2014 could turn out to be a major "turning point" for the global economy, and so far that is exactly what it is turning out to be. The following are 20 early warning signs that we are rapidly approaching a global economic meltdown...
Once upon a time, the only CME margin hike releases the investing population cared about were those for gold (because no matter how high the E-Mini went, the CME never seemed too bothered). Now, the CME has more "important" things to worry about - such as preventing the "heating bill shock" that will come in February when the majority of the population opens their electricity and heating statements for January (sorry, there goes the discretionary retail spending cash). And of course, the ongoing deterioration of the emerging markets, in this case led by Turkey and the absolute collapse in the Turkish Lira. Which is why about an hour ago, the CME decided to hike both TRY (to the USD and EUR) and Nat Gas margins, by 14 and 20% respectively. Will this normalize some of the vol seen around these products on Monday remains to be seen. Oh well, if not - the CME can just hike some more the same day, until it gets the desired outcome.