World stock markets started September with a sell-off, as concerns about the slowdown caused by the delta variant came to fore. Inflated valuations and high returns since the beginning of the year made it easier for investors to head for the emergency exit in the face of bad news.
However, there is no general widespread deterioration in risk appetite. We do not see a trend towards safe-haven investment instruments such as the US dollar, gold, and 10-year US bonds. Emerging country stocks outperform developed countries.
Turkish assets started to diverge negatively from emerging markets. MSCI Turkey, among the best performing stock indices globally with a 15 percent return in the July-August period, entered September with a 5 percent loss, losing a third of its gains. The Turkish lira was among the currencies of developing countries that lost the most value against the dollar.
According to economic data, there are no signs that require Turkey to wake up from its summer dream. Economic data such as growth, external balance, and fiscal policy surprised positively vis-à-vis concensus. On the inflation front, headline and core inflation give different signals. We see new year-highs in headline inflation due to food and energy price increases. Core inflation, which excludes food and energy, has turned its direction down.
The Central Bank, which wants to heal worsening expectations and sticky pricing habits, naturally emphasizes core inflation in its communication strategy. The cautious market players look at the Central Bank’s statement and see the warning of an interest rate cut in September.
Under normal circumstances, the markets do not pay much attention to a minor Central Bank’s statement and change positions. However, this was the reaction of the markets in an environment where risk appetite was low in global markets and the government’s exchange rate projections implicitly calculated from the Medium Term Program increased sharply.
In our opinion, there is no reason to change asset pricing after the statements of the MTEP and the Central Bank. We do not expect the Central Bank to cut interest rates in September. However, the anxiety and volatility in the markets will likely continue until the Monetary Policy Committee on September 23. For Turkey to enter the last quarter with a high probability of facing external shocks, the Central Bank must deliver a strong message at its September meeting. The statement must not be contradictory from the political front.
Source: Serhat Gürleyen, President, Is Securities
Translation: Cem Cetinguc