Lira is the biggest gainer as AKP gains majority

UK Manufacturing PMI : BOE nearer to tightening?
by Brenda Kelly

One could blame the weak Chinese data over the weekend for softer equity trading this morning. China’s factory activity fell for an eight straight month, illustrating a further slowdown in the world’s second- largest economy. Yet, following a stellar October for equities in general and with price action on the FTSE index re-establishing itself above the 50 month moving average following a volatile August and September, it’s little surprise to see a little caution taking hold today. UK Utilities are trading in the green, but only just, and even the consumer discretionary and staples sector is not the go-to area for safe haven flow today.

Much attention will be

This week brings with it the release of the quarterly inflation report and an expectation that the MPC see another hawk declared themselves in the form of Kristen Forbes. Sterling has once again taking a peek above the 1.40 level and has ultimately gained some 5.3% against the euro over the past fortnight.

UK manufacturing PMI also beat expectations with serious gusto. Perhaps we have become too downbeat on this aspect of the economy based on previous disappointments. New orders and output accelerated in October and with price pressure remaining latent we may finally be seeing the upside of deflation.

Eurozone manufacturing PMI was also slightly better than the flash figure, coming in at 52.3. In fact overall, the individual country PMIs have shown remarkable vigour and are reflective of the relatively high consumer confidence levels. News that Beijing is throwing a bone to the ECB and selling German bonds so that the Bundesbank have sufficient assets to purchase should help this theme to continue and while the euro seems to be fairly static (against the dollar) the divergences in policy do spell downside for the single currency from here. This may be a slow process but the effects on economic fundamentals are starting to materialise and even inflation expectations are starting to look a little more perky. Much will depend on the direction of oil and commodity prices in general from here. The question is whether the ECB will make good on hints that additional stimulus is on the way, or indeed if it will be required. The result is that European indices are outperforming the FTSE, the Dax up 0.5% on the back of better than expected earnings from Commerzbank.

There appears to be a mist of negativity descending over the FTSE which is trading flat exacerbated by a host of brokers taking a red pen to individual stock ratings.

Hikma Phrama (-5.08%) taking the bottom spot on the FTSE this morning as it cuts its generics forecasts to $150m down from the previous expectations of $175-200m.

BAE Systems (-1.14%) The FT reported that Europe’s largest defence contractor has agreed to buy a 20% stake in rocket engine maker Reaction Engines for £20.6m

HSBC (-1%) Bucking the trend of recent banking results, HSBC reported a better than expected 32% rise in pre-tax profit for Q3, this was mainly due to a reduction in costs from fines and settlements with regulators. A slowdown in Asia and the decline in equity markets there impacted revenue to the downside. It dropped 4% from the previous Q3 to $15.1bn. HSBC chairman Douglas Flint says the board has asked for more information about possible HQ move. Could delay decision beyond end of year.

Vodafone (-0.16%) Following on from the cyber-attack at Talk Talk last week, Vodafone UK reported on Saturday that hackers had accessed 1,827 customer accounts during the week.

Ryanair (-0.96%) Ryanair expects to post annual profits at the upper end of its forecast range as fuller-than-expected planes lift passenger numbers but remains lower this morning as it falls in sympathy with EasyJet and IAG.

BP (+0.66%) Raised to equal weight at Morgan Stanley.

EasyJet (-3%) cut to reduce versus hold at HSBC citing increased revenue pressure from capacity growth going into the winter. New price target of 1600p

IAG (-1.72%) cut to reduce versus hold at HSBC. PT of 625p. Company may struggle to exceed market view given high investor expectations

Whitbread (-1.3%): Downgraded by Numis. The company likely faces a slowdown in growth owing to competition from Travelodge and Airbnb. Cut to reduce with a new price target of 4440p v 5600p.

We call the Dow higher by 33 points to 17696.

Lira is the biggest gainer as AKP gains majority
by Ipek Ozkardeskaya

The lira has been the biggest gainer against the US dollar and the euro as the ruling party AKP gained majority in the government at November 1st snap election. As a knee-jerk reaction, the lira gained ten big figures against the US dollar. USDTRY hit 2.7580 for the first time since August, euro cheapened to 2.0439 lira for the first time in almost three months. Borsa Istanbul index gap opened at 83653.72 points (Friday’s close 79409).

The inversion on the front end of the lira sovereign yield has steepened however. The 1-year yield spiked to 10.30% from 10.25% last week, hinting that the post-election relief remains fragile.

The single party government could bring the economic stability and some social security that Turkey is craving for following months of geopolitical chaos in the region. Nevertheless, talks of a possible constitutional change and political uncertainties around such an important issue could be a drag for mid-long term investors. Therefore, Turkey may be facing a period of high market volatility due to the high proportion of hot money currently flowing in the country.

And there is the Fed. Turkey is among the most UST-sensitive emerging markets, alongside with Brazil, South Africa and India. Although it managed to reduce the gap in its current account deficit to 5.85% of its GDP from a disquieting 9.66% back in 2011, further improvement is necessary and needed to reassure the financial stability and reduce dependency to external factors. Turkish firms carry an important amount of foreign debt on their balance sheets; hence Turkey’s private sector is very vulnerable to external factors. Given the volatility vis-à-vis the Fed policy, the high energy dependency and the sensibility to US dollar and US treasuries, the accumulation of carry positions in lira assets – in other words, hot money – is a threat to Turkish assets’ values and price stability.

Turkey’s inflation figures are due tomorrow. The overheating consumer prices remain a growing concern for the central bank; however the heavy political pressure keeps the CBT’s hands tied regarding its rate policy. It has been months that investors are looking for simplification in Turkey’s three-rate monetary policy. Potential Fed normalisation by December could accelerate reforms in the monetary policy toward a simple and investor-friendly framework. This could be a positive development regarding the investor confidence. It is however not a done deal with the AKP government taking back the reins.

Happily though, the expansive ECB policy takes some off the pressure off the shoulders of the Central Bank of Turkey. The Eurozone stands for 44% of Turkey’s total exports. A cheaper lira provides a good competitive advantage to Turkish companies.

The rally in the lira and lira assets could be tempered by good macro news out of the US this week. The 2.85 level (Fib 50% on July – September rise) is key in the short-run. Below 2.85, the post-election momentum could well bring the USDTRY down to 2.75/2.60 band.

In the mid-long term, the lira depreciation is unavoidable, as the inflationary pressures and the current account deficit could only drive the lira cheaper. The pace of depreciation depends on the combination of Central Bank strategies and the evolution in rate differentials.