ref :- General
It may be the Labour Day holiday in the States today, but that doesn't mean that there's nothing going on. Quite the opposite in fact, though the main topics in the Monday morning round-ups are much the same as they were last week. At one level they've all moved on a stage, but since the developments in all three stories that we're looking at revolve around the words of not entirely impartial politicians, it would be unwise to invest too much faith in their comments. Still, inevitably markets DO instinctively react to what the things they hear and read even if their significance proves to be worth no more than a knee-jerk reflex.
So, with the enormous caveat that we are not at all sure that things are really any clearer this morning, what's going on ?
TURKEY :- Inflation rose to a rate of 17.9% in Aug, a little more than was expected, whilst producer prices jumped by a hugely worrying 32%. The Turkish Lira weakened sharply, with USD / TRY spiking above TRY 6.70 again. But soon afterwards, the Turkish central bank said that they would use all available tools at their disposal to tackle inflation at their monetary policy meeting on Sept 13th. Berat Albayrak, Finance Minister and son-in-law of President Erdogan, also confirmed that the central bank was independent and that the banking system was, and would remain, in good shape. You'd have to be a trusting soul to take that at face value but the market reaction to such statements hinges around the word "all", as in "would use all available tools".
If "all" really means all, then that would mean that interest rate hikes -- the only measure that markets believe could now be effective in capping inflation and supporting the currency -- are on the agenda for 10 days time. Cue : the lira rallied into TRY 6.56 against the dollar. But then again President Erdogan has been vociferous in his opposition to high(er) interest rates, and in his belief that they damage the economy. To then rubber-stamp rate hikes -- which many believe he would have to do despite his son-in-law's comments about central bank independence -- would in effect constitute a very public climbdown .... and climbdowns are not something one would readily associate with this most authoritarian figure. Cue : USD / TRY slipping out to 6.62 again, the markets a bit undecided as to what to make of the morning's developments.
Essentially, the central bank and the Finance Minister have implied rate hikes on Sept 13th, without actually signposting them directly. All one can say is that the monetary policy meeting has assumed even greater importance. If the authorities deliver a substantial rate hike, then we could see a significant relief rally in the Turkish Lira and Turkish assets. If they now fail to deliver such a measure ..... well, you ain't seen nothing yet.
ITALY :- Again, it's a question of what .... or who ..... to believe. After a downgrade of Italian sovereign debt by Fitch on Friday which saw 10yr yields up to 3.24% and their premium over their German counterparts approach 300 basis points, Finance Minister Giovanni Tria moved to calm the markets. In response to the negative speculation caused by the growing belief that Italy's upcoming budget deficit to GDP ratio will exceed the 3% limit, Mr Tria assured us that Budget stability will be respected. Once the budget details start to emerge (by the end of the month), the Germany / Italy 10yr spread -- perhaps the most accurate reflection of the comparative credit-worthiness of the two countries, will begin to narrow.
Very soothing words, of course .... and even Deputy PM Matteo Salvini, a character unaccustomed to masking his feelings for the sake of soothing anybody's feelings, said that the budget might be close to the 3% limit but would not exceed it. This morning that spread had narrowed to 282 basis points. The trouble is that it's hard to see how everything that everybody's saying can all be true at the same time. To stay within the 3% limit AND incorporate Mr Salvini's tax cuts and co-Deputy PM Di Maio's universal minimum wage, enormous savings would be required elsewhere .... far, far more than this government would be able or would even want to make.
Just to remind everyone of exactly how we stand, Mr Di Maio reiterated his conviction that the interests of the Italian people will always come before any consideration of what ratings agencies think of the nation. Fair enough in one sense .... but it's also another way of saying that political aims will be met regardless of the spiralling cost of government debt. Not so market-friendly .... 10yr yields are nearly back to Friday levels, and the spread is trading once more at 288bp.
UK / BREXIT :- You see why we don't like writing about Brexit ? We just can't know what form Brexit will take. Of course if you've got exposure to UK assets then one hopes that will have been hedged a long time before now, but reacting to every piece of news that seems to appear on an hourly basis is just a recipe for getting whipsawed.
Just a few days ago the EU's chief negotiator Michel Barnier seemed for the first time to be making more optimistic noises about the prospects of striking a workable deal. Now he's saying that UK PM Theresa May's plans cannot work. We cannot know how much of all that is said on both sides might be bluff and negotiating tactics ..... all we can say is that you shouldn't be trading on the back of such utterings (at least we shouldn't .... we haven't got the nerves for it). Anyway, partly as a reaction to M. Barnier's reversion to his former self, sterling is on the defensive again .... back down to $1.2870 against a generally strong dollar after trading above $1.30 on Friday.
But there's another element at play here .... Boris, of course. Mr Johnson has been teeing off against the approach of the government, saying that the deal that they seek is a sell-out by another name. To our eyes, deal or no deal, Mr Johnson is very obviously setting out his stall for a tilt at leadership of the Conservative party and by extension the post of Prime Minister. As we were saying last week, the problem with that is that one probably won't follow the other ..... at least not for long. The UK either gets another fatally divided ruling Tory party, or more likely an old-fashioned socialist replacement. As we were also saying, fundamentally sterling may be undervalued and could get quite a bounce if a deal is agreed, but looking at what might be on the horizon for the UK in domestic politics you might have to be pretty quick to take advantage of it.