Turkey

Sir Halford Mackinder’s 1904 speach in which he outlined his “Heartland Theory” was a founding moment for geo-politics. He argued that control of the Eurasian landmass (Europe, Asia and the Middle East), which contained the bulk of the world’s population and natural resources, was the major geo-political prize. As time passed, energy (first crude oil then natural gas), became increasingly integral to this concept and its strategic significance cannot be overstated. Remarkably, Mackinder’s theory has remained equally valid, if not more so, in the modern era - although key “pivot areas” for exercising control have evolved. In addition to Central Asia and Trans-Caucasus in Mackinder’s day, the oil producing nations of the Middle East took on increasing importance in the “New Great Game”. We see a “New New Great Game” emerging.

It was in October 2012 when we explained how Iran evades the Western blockade (ostensibly with the implicit nod of none other than the US), and when we first defined the concept of PetroGold in the context of the Turkey-Dubai-Iran crude-for-gold triangle. One year later, following Iran's unperturbed ability to exist in a world without US dollars, the blockade of Iran is a thing of the past, and the west has engaged in a full-blown detente with the country, much to the fury of both Israel and Saudi Arabia, lowering and in many cases outright eliminating Iran sanctions, which proved futile. So a happy ending for Iran (if only briefly). However, one country that has seen better days, whose government may be on the edge of collapse due to an unprecedented corruption scandal precisely for enabling said PetroGold scheme, and which has been in the news on a daily basis recently, is Turkey. As Turkey's Today's Zaman explains in "Iran's Turkish Gold Rush", the political crisis Turkey finds itself in may be nothing but a consequence of the PetroGold scheme conceived over a year ago, and in which Turkey played a crucial role.  Here is how the Turkey-Dubai-Iran PetroGold triangle, or as the Zaman calls it, "gas for gold", may soon result in the toppling of yet another government, simply because it showed that existence outside of the clutches of the 'Petrodollar' is perfectly possible...

With equity markets reacting enthusiastically to the Fed’s historic policy change announced last week, PIMCO's Mohamed El-Erian notes many have rushed to declare victory. Whether in asserting investor comfort with the policy regime shift or in declaring the definitive end of dependence on quantitative easing (“QE”), they believe that the markets’ short-term reaction can indeed be extrapolated into the longer-term. While most Fed officials will welcome the markets’ favourable reaction – and especially so after the May-June shock – El-Erian suspects that they are much more cautious. Indeed, in this FT Op-Ed, he lays out four reasons why such caution is understandable.

"There's no near-term resolution in sight," warns TCW Group's David Loevinger, as "Thailand has entered an extended period of political instability." This uncertainty has led to foreigners abandoning the nation's stock market in record  size - and collapsing the Thai Baht at the same time. Why should US investors be worried? Thailand was the catalyst that started the 1997 Asian crisis, broke LTCM, and instigated the most epic experiments in central bank liquidity provision on record. With the Fed Tapering, both Indonesia and Thailand (and Turkey) are already seeing major currency collapses but of course, as long as US equities rise, no one cares (which is exactly what they said last time)...

As we noted earlier, political instability is spilling into social unrest:

*TURKISH POLICE SEEK TO BREAK UP PROTEST IN ISTANBUL: NTV TV
*TURKISH POLICE USE TEAR GAS, WATER CANNONS TO END PROTEST

The crowd was chanting "Thief Tayyip Erdogan" in reference to Turkey's graft-probe-implicated PM. And the nation's European cousins are "growing concerned" at events in Turkey, calling for "transparent, impartial justice."

Muammer Akkas, the prosecutor who complained his government corruotion investigation efforts were being blocked by the government - has been removed from the investigation. Prime Minister Erdogan's efforts to rein in "the final attack" on "new Turkey" are failing even after his cabinet reshuffle but this morning's rhetoric has sent asset prices tumbling once more:

*'THE NEW TURKEY IS UNDER SERIOUS ATTACK': ERDOGAN
*IN NEW TURKEY, SOVEREIGNTY CAN'T LIE WITH JUDICIARY: ERDOGAN
*LAWMAKERS SHOULD AVOID REMARKS HURTING ERDOGAN: ARINC
*ERDOGAN SAYS HE'S ISSUING LEGAL COMPLAINT AGAINST MEDIA LEAKS

As one analyst noted, "Erdogan continues to present the developments as a conspiracy despite having to shuffle his cabinet, which indicates that there may be some serious findings behind the probe."

• Millions of Tons of Metals Stashed in Shadow Warehouses (WSJ)
• Moguls Rent South Dakota Addresses to Dodge Taxes Forever  (BBG)
• Fastest Japan Inflation Since ’08 Stokes Wage Pressure (BBG)
• Thai crisis deepens as army chief hints at intervention (Reuters)
• Anti-Assad Lebanese ex-minister killed in Beirut bomb (Reuters)
• Foreigners Unload Turkey Bonds as Probe Tarnishes Erdogan Growth  (BBG)
• Small ISS Change Shakes Up Boards: Tweak to Influential Shareholder Adviser's Recommendations Has Directors Rethinking Proposals (WSJ)
• Japan’s Nishimura Calls for Quick Corporate Tax Cut to Under 30% (BBG)
• Japan's Abe bets U.S. alliance, ratings can weather shrine visit (Reuters)

The world economy has experienced another year of subdued growth, having failed to meet even the most modest projections for 2013. Most developed economies continued trudging along toward recovery, struggling to identify and implement the right policies. Meanwhile, many emerging economies encountered new internal and external headwinds, impeding their ability to sustain previous years’ economic performance. Nonetheless, some positive developments in the latter part of the year are expected to gain momentum through the coming year. But the global economy is still subject to significant downside risks. In short, while the global economic outlook for 2014 has improved, policymakers worldwide must remain vigilant about downside risks and strengthen international cooperation. Developments in 2013 provide strong incentive for policymakers to do so.

Turkish stocks are tumbling, bond yields are soaring, and the Lira is collapsing to new record lows as the prosecutor in charge of investigating the nation's "Graft" case points out the seemingly obvious (but in public)...

*ISTANBUL PROSECUTOR SAYS GOVT INTERFERING IN GRAFT PROBE: NTV
*COURT ORDERS FOR SEARCH, DETENTION BEING PREVENTED, AKKAS SAYS
*TURKEY PROSECUTOR SAYS OFFICIALS CRIMINALLY DISOBEYING COURTS

Judge Akkas cites clear pressure on the judiciary through the police are affecting his ability to continue the probe into the Turkish government's potential misdeeds and corruption.

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• Yen Slides as Turkish Stocks Drop, U.S. Futures Rise (BBG)
• Turkish lira drops to record low against dollar, as Turkey’s Erdogan replaces 10 ministers (FT)
• Egypt designates Muslim Brotherhood as terrorist group (Reuters)
• Thai elections in doubt after political violence (AFP)
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• NSA Struggles to Make Sense of Flood of Surveillance Data (WSJ)

The Turkish high-profile corruption scandal, whose fallout has so far resulted in the jailing of the sons of the Turkish minister of the interior Muammar Guler, just escalated sharply following the abrupt resignation of three key ministers from PM Erdogan's government. Earlier today, first Economy Minister Zafer Caglayan and then Interior Minister Muammer Guler submitted their resignations to Prime Minister Recep Tayyip Erdogan Wednesday morning. A few hours later, they were joined by Environment and Urban Planning Minister Erdogan Bayraktar who also tendered his resignation as a member of parliament, however instead of doing so in a complacent manner, he lashed out at the PM and called for his resignation which roiled markets following an earlier relief rally.

• Edward Snowden, after months of NSA revelations, says his mission’s accomplished (WaPo)
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• UniCredit has reached an agreement to sell almost €1 billion in nonperforming loans to Cerberus (WSJ)
• U.S. mortgage applications fall as refinance hits five-year low (Reuters)
• Cohen Said to Have Warned Friend About Possible Federal Investigation (NYT)
• ‘Duck Dynasty’ Dad Risks $500 Million With Gay-Sin Remark (BBG)

While shortened Christmas Eve trading is traditionally the lowest volume day of the year, based on recent trends it may be difficult for today's action to stand out from the landscape thanks to an ongoing volume collapse, which however should make the even more traditional low-volume melt up that much easier. Sure enough, futures are modestly higher driven by their favorite signal, the EURJPY. Not surprisingly there has been particularly light newsflow with market closures in Germany, Italy and Switzerland in addition to early market closures for UK, France, Netherlands and Spain. Those markets that are open are trading in positive territory with the FTSE 100 being supported by BSkyB following an upbeat pre-market report for the company and their customer base, whilst the IBEX 35 is being supported by the financial sector. Overnight in China there was news of an injection of CNY 29bln via a 7-day reverse repo, although market commentators have said that this is more of a gesture than any meaningful intervention given the size of the country's banking market. Fixed income markets are particularly light with there being no trade in the bund future given the Eurex closure, with other trading products relatively flat given the lack of newsflow. However, the short-sterling curve has bear-steepened and thus continuing the trend seen since the end of last week as a result of both UK unemployment and UK GDP coming in better than expected.

Overnight one of the main stories is that the European Union has been downgraded to AA+ from AAA by S&P. While the market digests the impact of the downgrade, all eyes remain on the US treasury market. As Deutsche Bank notes, treasuries are increasingly being viewed as a potential sign of the success or not of the Fed taper in early 2014. From the lows in the immediate aftermath of Wednesday’s FOMC, 10yr UST yields have added more than 10bp. Yields continue to leak this morning (-2bp to 2.95%) though we’re still hovering at levels last seen in early September just before the Fed surprised markets with its non-taper. Despite this, US equities and credit were both reasonably well supported yesterday. However the combination of higher UST yields and a stronger dollar resulted in a fairly difficult day for EM. In EMFX, the Brazilian Real fell 1.1% against the USD, underperforming most other EM currencies. The move was exacerbated by the announcement from the BCB that it would wind back its intervention in the currency market, following the initial positive reaction to tapering on Wednesday. Other EM currencies also struggled including the TRY (-0.7%), MXN (-0.7%) and IDR (-0.3%). A number of EM equity markets struggled including in Poland (-0.7%) and Turkey (-3.5%).

• the risk of runs and asset fire sales in repurchase (repo) markets;
• excessive credit risk-taking and weaker underwriting standards;
• exposure to duration risk in the event of a sudden, unanticipated rise in interest rates;
• exposure to shocks from greater risk-taking when volatility is low;
• the risk of impaired trading liquidity;
• spillovers to and from emerging markets;
• operational risk from automated trading systems, including high-frequency trading; and
• unresolved risks associated with uncertainty about the U.S. fiscal outlook.