Brace for an extra eventful week

TURKEY - Report 20 Oct 2019 by Murat Ucer and Atilla Yesilada

The “ceasefire” protocol signed between US VP Mike Pence and President Erdogan was dead on arrival, as parties could not even agree on the definition of the safe zone. Both sides have enough ammo to claim by the deadline (Tuesday, October 22, midnight) the ceasefire agreement has been violated, after which time the Turkish side could resume the military campaign.

The US Congress is still determined to press on with sanctions bills, the first of which could reach voting stage late this week. Additionally, the EU is issuing stern warnings to Turkey to stop the military campaign.

Meanwhile, President Erdogan is flying to Sochi to summit with Putin to expand Turkey’s footprint in North East Syria, but his chances of finding sympathy are slim. Contrary to the majority view, politics author believes Operation Peace Spring does not amount to a victory for Erdogan.

On the econ front, except for home sales, which have surged in September largely thanks to cheaper credit (chiefly from state banks) and base effects, the past week’s data releases were generally disappointing, suggesting that the recovery in economic activity is not as strong as some may hope, unemployment rate remains elevated still -- and rising somewhat, and the budget trends are simply worrisome.

The key event of the upcoming week is the MPC meeting on Thursday, which will feature another battle by President Erdogan, this one against the “monetary trilemma”. Recall that we were expecting – before Syria tensions flared up – the CBRT would go for another 200 bps; the current ceasefire notwithstanding, tensions are running high on the Syria front, but this still seems to be the most likely scenario, assuming that the current (currency) calm lasts through Thursday.

Cosmo is bemused that markets didn’t pay any attention to Congress ignoring the Syria protocol. This week they will pay attention, as a probable CBRT rate cut will add to volatility in lira-denominated assets.

Now read on...

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