“Turkey’s true master is the peasant.” - Mustafa Kemal Atatürk
As an undergrad studying political science at Yale (when not focused on my major of ice hockey), a few notable names grabbed my attention. One, in particular, was Mustafa Kemal Atatürk, aka “The Father of Modern Turkey”.
Atatürk rose to prominence by securing the Ottoman Turkish victory at the Battle of Gallipoli during World War I. Following the Empire’s defeat and then dissolution, he led the Turkish National Movement resisting the partition of Turkey among the victorious allies. Atatürk established a provisional government in Ankara and defeated the forces sent by the allies to unseat him. This would become referred to as the Turkish War of Independence.
As the president of the newly formed Turkish Republic, Atatürk initiated a rigorous program of political, economic, and cultural reforms. He made primary education free and compulsory, opening thousands of new schools all over the country. Turkish women received equal civil and political rights during Atatürk's presidency ahead of many Western countries. While Atatürk was not without faults, his leadership put Turkey on a path of economic and industrial modernization that made her a beacon, not only in the Middle East, but around the world.
The current economic crisis in Turkey – highlighted by soaring inflation, a currency that has dropped a staggering 20% in a week, and ongoing trade disputes – would likely be causing Atatürk major indigestion were he still alive.
Currently, President Erdogan’s authoritarian grip on the country (manifesting in an apparent unwillingness to use standard monetary policy measures to combat inflation) appears to be worsening the crisis in a country laden with foreign debt obligations and current account deficit. Unlike Atatürk, it seems Erdogan does not realize that the average citizen of Turkey is ultimately her True Master.
Back to the Global Macro Grind...
The Turkish lyra is rallying this morning. It's up about 5% versus the U.S. dollar and the stock market is up about 2%, which may be a sign the Turkish economy is stabilizing for the moment. But it’s likely that the crisis is not over and the Turks may ultimately have to make more draconian moves like implementing capital controls if foreign capital continues to exit the country.
In our Chart of the Day below, we highlight Turkish 5-year CDS. It has reached levels not seen since the global financial crisis in 2008. Ultimately, Turkey’s ability to issue more debt, or refinance her current debt, may be the "True Master" of whether it can easily resolve this current economic crisis.
The larger issue for investors is confidence in emerging markets may falter more broadly. If volatility of currencies in other emerging markets is any indicator, such as South Africa (rand was down 9% on Monday) and India (currency hitting all-time lows), this is an important risk investors should keep front and center.
For those hoping for an abatement of interest rate hikes due to the economic issues abroad, that appears unlikely at the next Fed meeting. According to Fed Futures, the odds of a Fed Hike in September still sits around 90%. It's unchanged from last week. Currently, the market is also pricing in a 55% chance of an increase in December.
Meanwhile, the crypto currency market has been taken behind the proverbial woodshed and beaten like a rented mule over the last 24 hours. Of the top 10 cryptocurrencies with the largest market caps, only Bitcoin and Tether are not down double digits. In aggregate, the group is down 15%. Unfortunately for crypto enthusiasts, there is no central governing body that can raise rates to halt this decline. Talk about value disappearing into the proverbial “Ether”!
In terms of the daily data dump, there is a slew of data out over-night which is, largely, positive or at least benign:
- The U.S. NFIB Small Business Index is 107.9 versus 107.2;
- German August Zew Economic Sentiment is (13.7) versus consensus of (20.0) and prior of (24.7);
- Eurozone Q2 GDP (second estimate) 2.2%, which is a slight upwards revision from the prior estimate of 2.1%; and
- U.K. June ILO Unemployment rate came in better at 4.0% versus consensus estimate of 4.2%.
While the data from Europe is stable to positive, Chinese data is much more skewed negatively. New loans for July came in at CNY 1.45T versus a consensus estimate of CNY 1.20T, outstanding loans were +13.2% year-over-year versus 12.7% in the prior month, and, not surprisingly, money supply beat expectations coming in at +8.5% year-over-year. Despite these efforts to increase demand, Chinese industrial production was reported at +6.0%, missing expectations by 400 basis points, and unemployment ticked up to 5.1% from 4.8%.
Finally, we want to highlight a couple of corporate access events we are co-hosting the next couple of days in NYC. Today at 12:00pm ET we will be hosting a meeting with the CFO of AutoNation. Tomorrow at 12:30pm we will be hosting a meeting with the CFO of Ford. Both are interesting stories and if you are doing work on them, or associated names, please ping as we have a couple seats left at the events.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.85-2.99% (bearish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 7 (bullish)
Utilities (XLU) 52.38—53.70 (bullish)
REITS (VNQ) 81.34-83.39 (bullish)
Industrials (XLI) 74.45-76.79 (bearish)
Nikkei 216 (bearish)
DAX 123 (bearish)
VIX 10.85-15.11 (neutral)
USD 94.52-96.90 (bullish)
Oil (WTI) 66.02-69.75 (bearish)
Nat Gas 2.74-3.02 (bullish)
Gold 1196-1231 (bearish)
Copper 2.69-2.80 (bearish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
