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Turkey Needs Strong Monetary Authority

Turkey Needs Strong Monetary Authority

Wednesday, 16 May 2018 10:31 AM Current | Bio | Archive

Today’s news is once again dominated by politics.

The surprise came from North Korea that abruptly cancelled ministerial level talks with South Korea, quote, “indefinitely” and that were scheduled for today.

Besides that, North Korea also warned the U.S. to “think twice” about the Trump summit planned on June 12 in Singapore.

North Korea threatened to walk away from its meeting with President Donald Trump next month if the U.S. made a “one-sided demand” for the regime to surrender its nuclear weapons remained in place.

As always, we will have to wait and see if North Korea’s declarations/actions are part of the “tactics” it uses.

Investors should also keep in mind that North Korea has been trying to get President Trump to agree to a summit for years, which does perhaps raise a note of caution about the extent of compromise that is to be expected.

Anyway, the impact on the financial markets so far has remained very limited. The South Korean benchmark Kospi index gained 0.2 percent, while the South Korean currency, the won limited today’s loss to 0.3 percent.

Over in the Euro area, the drama of Italian politics continues with the two (2) “anti-parties”, the Northern League and the Five Star Movement parties, announcing this morning that they have reached the final stretch to form a government that is “against” things.

This comes after a leaked draft document suggests a larger fiscal deficit and that the European Central Bank (ECB) should cancel(!) any of the Italian bonds it holds as a result of the ECB’s quantitative policy. The two anti-parties ask the ECB to “forgive,” or write down 250 billion euros, which is about $300 billion of Italian debt, which in my opinion, should be relatively easy as the ECB does not hold Italian bonds as a result of its quantitative policy. Quantitative policy was conducted through the Bank of Italy.

The leaked draft of the coalition program also calls for a renegotiation of Italy’s European Union budget contributions, an end to sanctions against Russia and plans to dismantle a 2011 Italian pension reform that raised the retirement age, among other things…

No doubt that the Euro area could be on its way for new and serious internal tensions/disagreements, which would, if they should occur could negatively impact the euro, which is a situation that certainly has not been part of the recent overall FX euro forecasts and certainly could cause unease in financial markets overall.

Meanwhile in the world the Emerging Market economies, Turkey’s president Recep Tayyip Erdogan has issued a stark warning to his country’s central bank saying that if he wins a presidential parliamentary election on June 24, he’ll curtail the Turkish Central Bank independence in order to keep interest rates low, which is obviously a terrible (for not using another negative word) idea.

In the meantime, the Turkish lira (TRY) continuous its freefall and inflation at 10.9 percent continuous rising. The Turkish lira (TRY) has lost 15 percent against the dollar since January and the 10-year government yield has now risen to above 7 percent, up from 5.2 percent in January.

I think it’s certainly not an overstatement to say that Turkey needs a strong monetary authority, and not a stooge obeying to President’s Erdogan bizarre orders.

Investors however could do well keeping in mind that Turkish President’s Erdogan is acting like someone who’s throwing gasoline on an already raging fire where the Federal Reserve remains clearly on its path of raising interest rates, which pushes up the dollar as well as borrowing costs across the world, with Emerging Markets (EM) particularly under pressure as investors shift their money back to the U.S., prompting falls in local EM currencies and spikes in some EM country’s bond yields.

The Turkish president might soon regret his words. Yes, unless Turkey raises interest rates, and cuts spending, the economy could be in for a very hard landing.

Back to economics, in Japan first quarter GDP growth came in at 0.90 percent, weaker than expected with the Japanese consumer doing nothing in particular, and business spending falling. The normal suspects were poor weather and the general problems of dealing with seasonal adjustments at the start of the year are being blamed by Japan optimists.

The Eurozone's GDP grew by 2.5 percent year-on-year in Q1 of 2018, which was below the 2.8 percent in Q4 of 2017.

Year-over-year inflation in the Eurozone was down by 0.1 percent to 1.2 percent.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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I think it’s certainly not an overstatement to say that Turkey needs a strong monetary authority, and not a stooge obeying to President’s Erdogan bizarre orders.
turkey, strong, monetary, authority
Wednesday, 16 May 2018 10:31 AM
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