The week of the “400s”
Turkey is formally expelled from the F-35 fighter jet program, but insists on deploying S-400s, largely because Trump demurs at substantive sanctions. This week the visit of a high-level US delegation to Ankara and Trump’s meeting with the US Senators could reshape the crisis.
Politics section devotes a lot of space to “our forgotten war” in Syria, as Turkey piles forces and hardware to the border facing the Syrian Kurds. Most experts don’t anticipate a costly incursion against PYD-YPG, but we monitor the developments 24/7 because Ankara and PKK are locked into a battle of survival, with PKK possibly contemplating terror strikes in Turkey.
At home, recent polls show decent support for Ali Babacan, with former PM Prof. Ahmet Davutoglu also signaling he might resign from AKP soon. The said polls also unearth rising satisfaction with several pet policies of Erdogan and a nation-wide yearning for a better economy. A true “Black Swan” policy action to fast-track the economy by Erdogan should not be dismissed, with dangerous repercussions for the economy and markets.
In an interesting article last week, Reuters reported that there is little appetite among borrowers and lenders to work out some TL400 billion worth of troubled loans, as the Treasury states it’s not going to put up its own cash to expedite the process. Given the very lackadaisical recovery in the economy, bad loans could snowball in winter months.
Cosmo argues that the Fed can’t save EM, but could hurt positive sentiment if the FOMC pronounces “one and done”. The rally in Turkish assets relies at least on three things: Fed generosity; constructive ambiguity in the S-400 crisis and CBRT wisely knowing how much of a rate cut is too much.
The consensus (Reuters) is showing a 250 bps easing by the CBRT at the upcoming MPC meeting on Thursday, but the street whisper is “300 basis points is just right, 400 basis points will be overdoing it”. Our house view is that while a 300-350 bps rate cut is the most likely outcome, we would not rule out a bolder move, like 400 bps, as the CBRT is coerced into front-loading a good chunk of the planned monetary easing.
Please note that we are putting our weekly on its traditional summer holiday today, as we plan to publish our quarterly report next Sunday. Needless to say, we shall continue with our briefs and updates throughout the summer.
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