Turkey bombed ISIS targets in Syria and Iraq in retaliation for the Istanbul terror strike, but unless Erdogan decides to take on the fundamentalist terror organization, the outlook for substantive measures is bleak. We expect more terror attacks from ISIS. PKK is about to be defeated in the urban uprising, but AKP is in no mood for a new Peace Process. PKK may decide to focus on new cities as targets for rebellion.All in all, it looks like Turkey is going to fight two terror wars in 2016.
In the meantime, polarization in the society is reaching alarming levels, with President Erdogan declaring pro-Peace Process academicians “traitors”, some of which have been detained briefly. Paradoxically, Turks' traditional yearning for stability allows Erdogan to reduce the room for free speech, which may further retard the development of the nation and cause higher risk premiums at the end.
The key event of the upcoming week is the MPC meeting on Tuesday. Like the majority of market players and analysts, we expect the Bank to keep rates unchanged. The reason is simple: nowadays the Bank has been saying that it would start simplification if global volatility were to decline, but it hasn’t. No matter what is meant by simplification, whether it is a cut “from above” or “a hike from below”, this should mean no action on Tuesday.In any event, a cut of the O/N lending rate would be too risky because it would most likely trigger a January 2014 replay, while the Bank, for political reasons, seems rather averse to any kind of hike, which is, de facto, not even a hike, like an upward adjustment to the weekly repo rate. Hence, we conclude, no action is the most likely scenario for this Tuesday, without, of course, fully ruling out the surprises, given the Bank’s track record.
This being our take on the MPC in a nutshell, inside, we talk about fiscal data, which is not as good as it looks, and the November balance of payments data, which is as weak as it looks.
Cosmo thinks as long as the sell-off in EM is driven by China fears and the oil slump, Turkish assets will (relatively) outperform. But, He is getting worried about a “global credit shock” which may hit Turkish BoP hard. Like our economist, He expects the CBRT to delay normalization once again on account of rising volatility abroad, which would offer a good opportunity to increase positions.
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