Arrogant Policies

Submitted by Michael Every

Due to “arrogant” policies, the ruling party “must face the reality of decreasing public support”. These were the words of Turkey’s former PM Davutoylu who yesterday warned about the risks of the country drifting away from free market economics.  Arrogance is a term that has been applied to several current world leaders and is certainly one of many criticisms that has been hurled at UK PM May in recent months.  According to the Telegraph, local Conservative party chairs have backed an unprecedented poll which could put pressure on Tory MPs to change the leadership rules to allow them to hold an early vote on May’s future.  Having survived a no confidence vote in December, current rules suggest than another cannot be held until the end of this year.  The Telegraph is also reporting this morning that Brexiteer Boris Johnson is the Tory grassroots’ favourite to be the next UK PM, having pulled 17 points ahead of his closest rival. 

The Mueller report on Russian interference in the US 2016 election, or more specifically Trump’s apparent efforts to obstruct it, has provided the latest twist in the President’s colourful career.  Yesterday Trump stated that he was “not even a little bit” concerned about impeachment, House Speaker Pelosi has responded with the warning that “Congress will not be silent”. 

The announcement of the Trump administration that it would no longer exempt any country from US sanctions if they continue to purchase oil supplies from Iran has led to a spike in oil and oil stocks.  Eight waivers to countries that included China, India, Japan and S. Korea had been granted when Iran sanctions were re-imposed in November.  Brent crude has surged to over $74 /b with Iran’s threat to shut the Strait of Hormuz and supply concerns regarding Venezuala and Syria also unnerving investors. 

Commodities currencies such as the CAD, RUB and NOK have benefitted from the better tone of oil prices. That said, the best performing G10 currency over the past 5 days has been the JPY reflecting market anxiety ahead of Japan’s forthcoming extended spring break and the slew of market events that will occur within this holiday.  EUR/USD is trading on a slightly firmer note this morning having reached a 10 day low ahead of the Easter break.

Week ahead 

Firmer oil stocks helped to support the S&P 500 yesterday in a holiday thinned session. However, a tone of apprehension was still evident ahead of the week’s slew of corporate earnings. About one third of US companies are due to report this week including several major tech firms.  Analysts have been concerned that slower world growth, trade wars and the tapering of support from Trump’s tax cuts could lead to a more difficult trading environment for corporate America in 2019. 

The release of advance US Q1 GDP on Friday will be one of the key releases of the week. The data, which will incorporate the period of the government shutdown, are expected to show annualised quarterly growth in the region of 2.2%.  The release is likely to set the stage for the May 1 FOMC meeting. 

The Fed’s policy meeting follows those from the BoJ, BoC, Riksbank and central Banks of Russia, Turkey and Indonesia this week.

Germany’s IFO release tomorrow will provide the latest reading on what has been a run of disappointing news regarding European’s largest economy.  Last week, the reading of German manufacturing PMI registered 44.5, from 58.1 a year ago. 

Trade is set to remain a key theme of the coming days. EU leaders will meet with Japan’s PM Abe on Thursday before he travels to the US for a summit with Trump. 

As the UK parliament regroups after its Easter recess, the reprieve from Brexit related rhetoric can be expected to come to an end.  Cross party Brexit talks are expected to resume as will concerns about the weakening of the two party political system in the UK.  Ex-UKIP leader Farage, who has launched his new Brexit Party, has reportedly vowed to cripple Labour by targeting its Brexit voters in its heartlands.  

In Turkey, the main focus in the coming days will be a crucial verdict from the High Election Board on whether the disputed outcome of elections in Istanbul should be repeated.  After its candidate was defeated in the March 31 vote, the AKP applied to cancel it.  If the High Election Board yields to pressure from the AKP and decides to repeat local elections in Istanbul, it is likely to raise concerns amongst already nervous investors whose confidence in the lira and local assets is relatively low as reflected in persisting underperformance of the Turkish currency so far this year.

Former Prime Minister Davutoglu’s strong criticism of government policies over the weekend stem from the fact that Turkey is in a severe recession caused by the precipitous fall in the value of the Turkish lira.  Without directly attacking President Erdogan, Davutoglu said that “we can’t manage the economic crisis that’s in play by denying its existence.” This is a very rare criticism of President Erdogan from a prominent member of his AKP party. That said, President Erdogan’s position within the party is too strong to expect an open rebellion that would cause a split of the AKP. Bloomberg reported that Davutoglu didn’t try to poach any AKP lawmakers and instead prioritises an overhaul of the party from the ground, according to a person familiar with his thinking.