Stocks on both sides of the Atlantic were mostly higher on Monday, but investors were still shocked by the turmoil in Turkey’s emerging financial markets after the country’s central bank chief was sacked by President Recep Tayyip Erdogan. Trading volumes were relatively light as markets focused on key speeches this week from Federal Reserve Chairman Colin Powell and other officials, with the dollar reeling from a surge that had pushed it above the 92-mark. Spot gold also retreated, falling as low as $727.10 or as much as $20. Bowie will speak today at a BIS conference on innovation in the digital age.
“Investors will continue to watch interest rates anxiously in the coming months,” David Kostin, strategist at Goldman Sachs, wrote in a note Monday. “Like the Fed, our economists expect a temporary uptick in core PCE inflation this spring due to short-term factors, including the base effect of soft inflation through 2020.”
“While inflation is likely to fall back to 2.0 percent in 2022, investors will be concerned that above-target inflation could persist and could cause interest rates to rise further,” Kostin added. “Our rate strategists expect the 10-year Treasury yield to hit 1.8 per cent by June.”
Cyclical and value stocks have outperformed tech and growth stocks so far in 2021 as investors focus on the outlook for economic recovery and inflation. Some strategists say they believe the new frontrunners have room to run as the recovery advances.
“Our US economic indicators have moved into the middle of the cycle, when inflation is typically strongest,” Bank of America strategist Jill Carey Hall wrote in a note. Small caps and value stocks typically outperform large caps and growth stocks at this stage — and we expect the earnings recovery and economic rebound this year to further support this performance.”
But she added, “Inflation-sensitive sectors such as energy and materials remain at a significant discount to historical levels across the various measures we track, and the S&P 500 as a whole is pricing in a tepid inflation outlook.” “Among small caps, cyclical stocks continue to trade at a significant discount to defensive stocks, and inflation-sensitive small cap sectors such as energy are generally cheap relative to both historical and large-cap stocks.”
Trading volume was relatively light as the market focused on a flurry of speeches from Federal Reserve Chairman Jerome Powell and other officials, with the dollar index heading higher and falling after briefly touching above 92. Spot gold also continued to be under pressure, falling as low as 1730 below, down nearly $20 at most on the day.
On Friday, the Fed said it would not extend temporary outbreak-related regulatory easing measures set to expire at the end of this month. Big U.S. banks will have to resume holding additional capital against U.S. government debt and central bank deposits starting next month.
In that scenario, U.S. commercial banks would have less incentive to hold or buy more Treasurys, so demand for Treasurys would fall, meaning yields would rise further, another blow to gold, analysts say.
Michael McCarthy, chief market strategist at CMC Markets in London, said gold was clearly not a beneficiary of Monday’s sharp drop in the Turkish lira. “The strength of the US dollar has been the main driver for gold, with the market looking more favourably towards the US dollar and the yen.”
In view of the tragic scene of Turkish financial market mentioned above: FX168 mentioned in an article before, the main reason is that Erdogan dismissed the central bank governor Naci Agbal after only four months in office, which triggered the big crash of Turkish stock and bond exchange……
Turkish President Recep Tayyip Erdogan has announced the appointment of Kavzegolu as the new governor of the Central Bank of Turkey. The former governor, Abbar, was sacked. Mr Abbar’s dismissal has been linked to an interest rate rise by Turkey’s central bank on March 18. On the same day, Turkey’s central bank announced it was raising its benchmark interest rate to 19% from 17%.
The Turkish lira plunged in the early hours of Monday March 22 local time. At one point during the day, the Turkish lira fell from 7.2 to 8.4 to the dollar, with the currency tumbling as much as 17% against the greenback.
Edward al-Hussainy, senior rates and currency analyst at Columbia Threadneedle, said Agbal’s macro policies were appropriate, and undoing them would be painful and hurt the attractiveness of Turkish assets.
“Monday will be a long, dark day,” said one local fund manager. Cristian Maggio, an analyst at TD Securities, had expected the lira to fall by 10 to 15 percent in the coming days.
Turkish lira/dollar implied volatility spiked to its highest level since March 2019, when Turkish President Recep Tayyip Erdogan ousted central bank governor Fenics. Five-year credit default swaps on Turkey jumped to 464 basis points from 305 basis points on Friday. Turkey’s benchmark 10-year bond yield rose to 16.26 per cent from 14.06 per cent on Friday.
In addition to the currency market, the Istanbul Stock Exchange issued a statement saying circuit breakers had been triggered across the market. Trading in the stock market, in the derivatives market and in the stock index contracts and in the debt securities stock repo market was suspended.