Trade the range
By Peter Rosenstreich
No real issues took centre stage in a directionless market. Global equities were mixed as movement was based on idiosyncratic events. Overall, there remains a slightly bias to be risk off, as the list of issues that would damage global demand and investment confidence has only grown longer. The lack of direction indicates unfamiliar uncertainty, which does not translate to core measures. Example: We view the likelihood of US President Trump to start a trade war or become China's best friend as nearly balanced. Yet the final result would have extremely different outcomes. VIX index remains close to lows, reflecting unconcern. Despite marginal slowing in domestic manufacturing indicators, globally the situation remains healthy.
Another example of almost binary outcome is Brexit. As we near the first arbitrary deadline and with total chaos in UK politics, sterling assets are balanced. We suspect that playing the short-term range in FX remains the dominant strategy over picking a clear direction. The USD advance seems tired as Trump's fiscal boost, long positions on money market are stretched (only slightly off highs) and dark clouds over the US midterm elections should generate considerable headwinds. Yet Europe is not helping investors focusing on the positive, as ECB member Olli Rehn raised concerns over Italy's budget deficit. Crude oil is providing the only real direction lifting commodity linked FX and stocks. With US drillers coming offline, distillate exports near two-year lows and Iran production coming offline as well, the prospect of $90 a barrel looks promising.
Turkish inflation rises to record levels
By Arnaud Masset
The Turkish lira took another hit on Wednesday amid disappointing inflation figures. The headline inflation measure broke another record in September as it climbed to 24.52%y/y, beating widely the market estimate of 21.10% and up from 17.90% in August. The core measure does not give cause for optimism as it surged 24.05%y/y compared to forecasts of 19.31% and 17.22% in the previous month. USD/TRY rose as much as much as 1.80% to 6.0969 following the announcement, before easing to 6.0440.
The Central Bank of Turkey increased the one-week repo rate by 16% this May, but it looks like further hikes are in the pipeline. Indeed, after finally getting along with market expectations and raising the interest rate, the Central Bank has no choice but to keep moving in the same direction. A step back would be devastating for the lira, as it would destroy investors' trust, which is still very fragile. The next central bank meeting is scheduled for 25 October. In the meantime, and assuming that Erdogan takes a backseat, the lira should continue to trim losses slowly.