US data weak but markets focussed on Trump
(Yann Quelenn, market analyst)
US GDP came in on Friday at 1.9% y/y, marking the 11th consecutive year of growth below 3% (estimates were about 2.2%). The decrease in exports, associated with more significant imports, has driven GDP lower. In addition, consumption is somewhat sluggish with a decline.
Markets on Friday ended slightly lower. The S&P 500 closed below 2300 points. Markets remain upbeat about Trump’s plan to stimulate the economy through tax cuts and infrastructure spending. In the latest revelations, Trump stunned this weekend with his selective immigration ban, providing a clearer picture of his aggressive political intent. The dollar has been weakening since the opening last night.
Looking at the markets, we believe that it is unlikely that the Fed will raise rates in the first half of 2017. Data is barely moving markets and Trump's ability to deliver is actually a key factor for the Fed to assess the US economic situation. Inflation is needed in the US and we maintain our view that the US central bank will let it run in order to kill its massive debt. For this reason, we remain bullish EUR/USD over the medium-term.
Double whammy for Turkey
(Arnaud Masset, market analyst)
On Friday, Fitch downgraded Turkey’s sovereign debt to junk, while Standard & Poor’s cut its outlook for the country “from stable” to “negative”. S&P already cut Turkey two notches below the investment grade threshold back in November last year, while Moody’s downgraded it to junk last September. Fitch was therefore the last agency to offer an investment grade. In a statement on Friday, Fitch explained its motive: "Political and security developments have undermined economic performance and institutional independence”. Even though the move was broadly expected, it still sent a negative signal to investors.
The Turkish lira’s reaction was relatively muted as the decision was already priced in. USD/TRY has been moving sideways at around 3.87 as investors are reluctant to increase their short TRY positions. Indeed, the central bank increased its overnight lending rate by 75bps to 9.25% but kept its two other benchmarks unchanged. Right now, the CBT is stuck between a rock and a hard place. We believe that it is doing its best to maintain order itself despite pressure from investors, who want tighter monetary policy, and the government which is pressurising the bank to keep lending rates as low as possible. CBT’s behaviour moving forward will be key in determining the outlook for the lira. Ultimately, the bank will either decide to protect its credibility or to obey the government.