Trader Scoffs At “Mind-Boggling” Market-Bounce ‘Turkey Is Contained’ Rationalization

The Dow is up over 100 points and the Turkish Lira is up 5%, rallying away from the dreaded 7.00 Maginot Line of global doom… and judging by the notes and business media narrative this morning, it’s time to “dive right back in, the water’s warm.”

You may be able to sense out skepticism and as former fund manager and FX trader Richard Breslow notes, it’s “mind-boggling” how fast market participants jump back to the narrative du jour, no matter how obvious reality (lurking right behind the corner) really is.

Via Bloomberg,

Having a market narrative is a necessary thing. How else would you answer the question, “What’s going on?” But it can also be dangerous. There is a big difference between saying things are bouncing, pausing or, even, traders are having a bit of a rethink and declaring that the excitement is all over and it is carry as usual. We don’t know that, even if it turns out to be true. And, unless you are willing to stipulate that everything we said yesterday about dollar-funding risk and current-account deficits was off-base, it’s not helpful.

What we have learned from this latest emerging market episode is that in this nascent transitioning period from ultra-low global rates to just low ones, policy mistakes get magnified. With the medicine required to set things right difficult and painful to swallow. Made all the worse with liquidity conditions being permanently impaired. And the prospect of higher rates is unlikely to go away unless something bad happens to cause central banks to panic. Something to consider as we try to argue anew that what happens in Turkey, stays in Turkey.

And it is making a remarkable leap of faith in the resiliency of global assets that this morning, we went from debating whether 1,000 basis points of rate rises or capital controls would be required to stem the immediate panic to asserting that locals drove the currency 5% higher by “taking profit.”

Lest you think correlation matrices can cleverly decide at a moment’s notice what matters and what doesn’t, while the lira rallied, the U.S. Treasury curve bear flattened as, I am told, the market began repricing the Fed rate hike path higher again. And doing so on big volume for Eurodollar futures. Think about it. Isn’t it higher funding costs that was what we were all talking about? S&P 500 futures also got in on the game.

Markets all over the world may rally if the American being held is released. I bet I hear from no one that this represents a second chance to lighten positions. But you will have to listen to lots of people tell you they thought USD/TRY looked toppy over 7. Never mind that was the level that was going to tip over the whole apple cart.

It’s mind-boggling that 5% one way or another doesn’t answer the questions about where things stand with Turkey. And the knock-on effects for the rand or ruble are pretty much just that. So while the U.S. curve puts back in a rate path assumption that most likely shouldn’t have changed as much as it did last Friday, I can’t help but wonder why EUR/CHF is hanging out around 1.13 and peripheral spreads in Europe are still way up here….

And what it means that the data out of China last night was so mediocre, right across the board.

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Censorship Is What Happens When Powerful People Get Scared

Authored by Mike Krieger via Liberty Blitzkrieg blog,

“Only the weak hit the fly with a hammer.”

– Bangambiki Habyarimana

Anyone who tells you the recent escalation of censorship by U.S. tech giants is merely a reflection of private companies making independent decisions is either lying or dangerously ignorant.

In the case of Facebook, the road from pseudo-platform to willing and enthusiastic tool of establishment power players is fairly straightforward. It really got going earlier this year when issues surrounding egregious privacy violations in the case of Cambridge Analytica (stuff that had been going on for years) could finally be linked to the Trump campaign.  It was at this point that powerful and nefarious forces spotted an opportunity to leverage the company’s gigantic influence in distributing news and opinion for their own ends. Rather than hold executives to account and break up the company, the choice was made to commandeer and weaponize the platform. This is where we stand today.

Let’s not whitewash history though. These tech companies have been compliant, out of control government snitches for a long time. Thanks to Edward Snowden, we’re aware of the deep and longstanding cooperation between these lackeys and U.S. intelligence agencies in the realm of mass surveillance. As such, the most recent transformation of these companies into full fledged information gatekeepers should be seen in its proper context; merely as a dangerous continuation and expansion of an already entrenched reality.

But it’s all out in the open now. Facebook isn’t even hiding the fact that it’s outsourcing much of its “fake news” analysis to the Atlantic Council, a think tank funded by NATO, Gulf States and defense contractors. As reported by Reuters:

Facebook began looking for outside help amid criticism for failing to rein in Russian propaganda ahead of the 2016 presidential elections…

With scores of its own cybersecurity professionals and $40 billion in annual revenue in 2017, Facebook might not seem in need of outside help.

It doesn’t need outside help, it needs political cover, which is the real driver behind this.

But the lab and Atlantic Council bring geopolitical expertise and allow Facebook to distance itself from sensitive pronouncements. On last week’s call with reporters, Alex Stamos, Facebook’s chief security officer, said the company should not be expected to identify or blame specific governments for all the campaigns it detects.

“Companies like ours don’t have the necessary information to evaluate the relationship between political motivations that we infer about an adversary and the political goals of a nation-state,” said Stamos, who is leaving the company this month for a post at Stanford University. Instead, he said Facebook would stick to amassing digital evidence and turning it over to authorities and researchers.

It would also be awkward for Facebook to accuse a government of wrongdoing when the company is trying to enter or expand in a market under that government’s control.

Facebook donated an undisclosed amount to the lab in May that was enough, said Graham Brookie, who runs the lab, to vault the company to the top of the Atlantic Council’s donor list, alongside the British government.

Facebook employees said privately over the past several months that Chief Executive Mark Zuckerberg wants to outsource many of the most sensitive political decisions, leaving fact-checking to media groups and geopolitics to think tanks. The more he succeeds, the fewer complications for Facebook’s expansion, the smaller its payroll, and the more plausible its positioning as a neutral platform. Facebook did not respond to a request for comment.

With that in mind go ahead and check out the Atlantic Council’s donor list and all the shady characters on its board.

Now that it’s been established that Facebook is in fact censoring based on advice provided by former spooks and other assorted establishment charlatans, let’s talk about what this means. I think there are two major takeaways.

First and foremost, the entire push to make arbitrary de-platforming by tech giants the new norm proves the establishment is scared to death. The very powerful folks accustomed to manipulating and shaping the world via narrative creation aren’t terrified about what Alex Jones says, they’re terrified that it’s popular. The establishment “elites” are in such denial about the consequences of the world they created, all they can do is spastically attack symptoms. Trump didn’t divide U.S. society and Alex Jones didn’t cause our widespread (and entirely justifiably) distrust in institutions; the status quo system did that via its spectacular failures. Trump’s election and Alex Jones’ popularity are merely symptoms of an incredibly corrupt and failed status quo paradigm, the stewards of which continually refuse to take a look in the mirror, accept blame and reform.

The way I see it, two key events of the 21st century directly led to the situation we find ourselves in currently. The launching of the Iraq war based on false evidence spread by intelligence agencies, politicians and the media, and the decision to bail out bankers and protect them from jail in the aftermath of the financial crisis. Combined, these two things created an environment of anger and distrust in which nearly anything becomes possible politically and socially. Trump and Alex Jones are symptoms of a failing society, not the root causes of it.

If I’m right about this, censorship of such voices by SilIcon Valley billionaires will backfire spectacularly. Alex Jones has now been made a martyr by tech oligarchs and deep state think tanks, which gives him more street cred than he had before. De-platforming does nothing to the demand side of the equation when it comes to his content, as we saw with his Infowars app soaring in the charts soon after the purge. If people want to find Alex Jones and Infowars, they will find it. Moreover, other communities are beginning to wake up to how dangerous all of this is. For example, last week we witnessed a growing number of Bitcoiners create accounts at decentralized Twitter-alternative Mastodon in case Jack Dorsey decides to step up censorship there.

Ultimately, it’s safer for society to have open public forums where all ideas — whether you consider them dangerous and crazy or not — can be openly expressed alongside each other. That way we can see what’s out there and debate or debunk them in front of large and diverse audiences.

This is 2018 and de-platforming popular content won’t make it go away. It’ll just shift it over into areas of the internet you can’t see, where it’ll fester and grow stronger over time in even more intense and radicalized echo chambers. You’ll think it’s gone from society because it’s been safely cleansed from your corporate-government Facebook timeline, but it may grow even stronger in the shadows. This is particularly the case in a nation dominated by an entrenched, corrupt and unaccountable elitist class. One that refuses to confront the reality of its monumental failures, and instead chooses to self-interestedly obsess over what are just symptoms of a decadent empire in decline.

*  *  *

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Dozens Reported Dead After Raised Motorway Collapses In Italy

Italian firefighters said a number of cars may have fallen after a raised section of the A10 motorway fell in Genoa and Italy’s ambulance service is reported as saying ‘dozens’ may have been killed. A fire service spokesperson told AFP that the bridge had mostly fallen on rail tracks 100m below and that “cars and trucks” had fallen with the rubble.

About 10 vehicles were involved when the structure, known as the Morandi bridge collapsed, Italian news agencies reported. Private broadcaster Sky TG24 said a 656-feet section went down over an industrial zone.

Images posted by state police and witnesses showed a huge section of the bridge missing. Parts of the structure also landed on the rooftops of nearby buildings. The bridge was built in the 1960s and stands about 328 feet tall.

The Italian fire service said that the viaduct, located in an industrial area in the west of the city, collapsed at around 10am Irish time.

Television images showed the viaduct in the mist with a huge chunk missing, with Italian media reporting that 200 metres of the Morandi bridge had fallen away.

A witness recorded the following video from his office moments after the collapse of the roadway.

A rescue mission was underway for survivors. Authorities suspected structural weakness was the cause of the collapse, ANSA reported. A witness told Sky Italia television he saw “eight or nine” vehicles on the bridge when it collapsed in what he said was an “apocalyptic scene”. 

Transport Minister Danilo Toninelli said in a tweet that he was “following with great apprehension what seems like an immense tragedy”.

Shares of Atlantia, the Italian infrastructure and construction company that manages highways, slumped as much as 6.2% on the news, most intraday in more than 2 years and was the biggest decliner on FTSE MIB. According to Bloomberg, Atlantia lists A10 Genoa-Serravalle as one of the highways its Autostrade per l’Italia unit operates.

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Global Stocks Rebound As Relief Rally Sends Turkish Lira Sharply Higher

The “manic Monday” turmoil that rocked global markets at the start of the week, eased during Asian hours on Tuesday and followed through in the European session sending global markets higher as most European stocks tracked gains across most Asian equities as global markets steadied. The catalyst: after its latest furious plunge, the Turkish lira recovered much of yesterday’s loss while the yen slumped sending the Nikkei 2.3% higher and the dollar slipped from its highest in 14 months and Treasuries fell.

The Turkish lira jumped 5% and the country’s benchmark equity index rose 1.3% even as the diplomatic standoff between Turkey and the U.S. dragged on. The market remained unfazed even after president Erdogan vowed to boycott US electronic goods and after National Security Adviser Bolton warned Turkey’s ambassador on Monday that the U.S. has nothing further to negotiate until a detained American pastor is released.

According to media report, the lawyer for Pastor Brunson filed an appeal to release the Pastor from house arrest and lift his travel ban. The Turkish foreign minister said a US Consular official is set to visit Pastor Brunson today.

In his latest defiant speech, Erdogan also said that Turkey is taking the necessary measures regarding the economy and that it is important to keep a firm political stance. Separately, the Turkish Central Bank opened their FX Repo auction, with the interest rate at 19.25% for TRY (vs. 17.75% Prev.) and 2.00% for USD. They did not open their Repo auction.

In Europe, the Stoxx Europe 600 Index climbed alongside US index futures as Italian debt fears eased, while the euro edged lower. The German economy accelerated in the second quarter, driven by stronger domestic consumption and a slight pickup in investment. U.K. unemployment dropped to a new 43-year low in the three months through June but the pace of wage growth eased. The jobless rate stood at 4%, the least since February 1975, the Office for National Statistics said on Tuesday. Economists had expected it to stay at 4.2 percent. Still, the FTSE was the underperforming bourse, weighed on by mining names. This came in the wake of poor Antofagasta earnings, which were hit by a 16% drop in core earnings, and are close to the foot of the Stoxx 600.

In Asia, rhe ASX 200 rose +0.8% and the Nikkei 225 was +2.3% higher with Australia lifted by a broad positive tone across nearly all sectors and as focus shifted back to earnings, while Japan outperformed as exporters coat-tailed on a rebound in USD/JPY. Meanwhile, shares in Shanghai and Hong Kong dipped after disappointing data in which Industrial Production, Retail Sales and Fixed Urban Assets all missed estimates and the Unemployment Rate also increased.

In FX, the Turkish lira rallied the most among world currencies against the dollar while the Bloomberg Dollar Spot Index slipped for the first time in four days.  In a sign that investors are still trying to work through the implications of Turkey’s meltdown, the Indian rupee hit the 70-per dollar mark, a record low.

In the latest Brexit news, Tory Brexiteers are said to be planning to challenge PM May by publishing their own blueprint favouring a hard Brexit. The paper is due to be published next month and is expected to have the backing of 60 to 80 Conservative MPs. It is understood the paper is to allow a possible Canadian-style free trade agreement, only if the EU backs down on demands over the Irish border.

The oil market benefited from the return to a positive risk tone and has erased the previous sessions losses, with both WTI and Brent up ~0.8% on the day, with traders looking ahead to the latest API release with expectations set to show a draw in Crude by 3.27mln, Distillates to build by 0.9mln and Gasoline to draw by 0.8mln. In the metals scope, Gold is flat whilst copper has fallen for the third day straight and pushed YTD losses to 16% as poor Chinese retail sales data suggests demand could slow from the Asian country. Silver (+0.7%), platinum (+0.9%) and palladium (+0.1%) were all beneficiaries of the improved risk sentiment, however, with all of the precious metals up on the day.

Market Snapshot

  • S&P 500 futures up 0.4% to 2,835.25
  • Brent futures up 1% to $73.35/bbl
  • Gold spot up 0.1% to $1,195.08
  • U.S. Dollar Index down 0.1% to 96.29
  • STOXX Europe 600 up 0.4% to 386.25
  • MXAP up 0.5% to 163.13
  • MXAPJ down 0.08% to 527.37
  • Nikkei up 2.3% to 22,356.08
  • Topix up 1.6% to 1,710.95
  • Hang Seng Index down 0.7% to 27,752.93
  • Shanghai Composite down 0.2% to 2,780.97
  • Sensex up 0.7% to 37,913.86
  • Australia S&P/ASX 200 up 0.8% to 6,299.64
  • Kospi up 0.5% to 2,258.91
  • German 10Y yield rose 1.6 bps to 0.327%
  • Euro down 0.01% to $1.1409
  • Italian 10Y yield rose 10.7 bps to 2.829%
  • Spanish 10Y yield fell 2.0 bps to 1.434%

Top Overnight News from Bloomberg

  • The German economy accelerated in the second quarter, driven by stronger domestic consumption and a slight pickup in investment
  • U.K. unemployment dropped to a new 43-year low in the three months through June but the pace of wage growth eased. The jobless rate stood at 4 percent, the least since February 1975, the Office for National Statistics said on Tuesday. Economists had expected it to stay at 4.2 percent
  • A car crashed into the barriers outside Britain’s Parliament on Tuesday, leaving several pedestrians injured. Police said they had arrested the driver
  • A rally in bonds from China’s local government finance vehicles, sparked by the recent easing measures, may be at risk of losing momentum after a surprise bond default by a state-owned firm on Monday
  • A slew of data, including industrial output and retail sales, suggested that China’s economy hit a mid-year rough patch as efforts to curb risky lending and excessive debt collided with a deepening trade war
  • Yuan’s trading band will be further widened and the currency will eventually become a free float, PBOC-run Financial News says in a front-page report, citing an unidentified expert
  • Japanese retail investors are dumping the Turkish lira as a sell-off that saw the currency sink to a record low on Monday shows few signs of abating

Asian equity markets traded mixed as some of the regional bourses shrugged off the negative lead from Wall Street where the S&P 500 and DJIA declined for a 4th consecutive day amid the Turkey-triggered turmoil, although China underperformed as participants digested weaker than expected data. ASX 200 (+0.8%) and Nikkei 225 (+2.1%) were higher with Australia lifted by a broad positive tone across nearly all sectors and as focus shifted back to earnings, while Japan outperformed as exporters coattailed on a rebound in USD/JPY. Elsewhere, Hang Seng (-0.6%) and Shanghai Comp. (-0.2%) underperformed their peers and traded negative amid disappointing data in which Industrial Production, Retail Sales and Fixed Urban Assets all fell short of estimates and the Unemployment Rate also increased. Finally, 10yr JGBs were weaker amid the improved risk appetite in Japan with prices also subdued by the absence of the BoJ’s bond buying program from the market today. PBoC skipped open market operations for a net neutral daily position.

Top Asian News

  • China Growth Momentum Stalls as Debt Campaign and Trade War Bite
  • Smartphone Suppliers Lead Tech Stock Selloff in Hong Kong
  • China Literature Falls After $2.3 Billion New Classics Deal
  • Jet Airways Lenders Are Said to Be Wary of Giving New Loans

European equities started the day firmer (Euro Stoxx 50 +0.2%) however gains have been trimmed as Erdogan continues his defiant tone. The FTSE is the underperforming bourse, weighed on by mining names. This coming in the wake of poor Antofagasta earnings, which were hit by a 16% drop in core earnings, and are close to the foot of the Stoxx 600.

Top European News

  • Car Crashes Into U.K. Parliament Barriers; Police Arrest Driver
  • U.K. Unemployment Falls to New 43-Year Low But Pay Growth Slows
  • Stronger Euro-Area Economic Growth Defies Trade War Threats
  • Italy Bonds Rally as Budget Concerns Ebb, Lira Takes a Breather

In FX, a more concerted TRY recovery filtered through the region and beyond again, with a broad improvement in other ‘risky’ currencies and sentiment overall. The Lira is currently pivoting 6.5000 vs the Usd vs 7.2000+ levels at one stage yesterday, as the CBRT augments its RRR interventions via a hike in financing costs at the latest FX auction, albeit not actually opening the repo for a 2nd day presumably due to no excessive demand for extra funds/liquidity. Elsewhere, the Rand, Rouble and Peso are also paring heavy losses, for the time being at least after similar rebounds in Asian counterparts overnight, bar the Yuan that was undermined buy a raft of sub-consensus Chinese data overnight and yet another higher Usd/Cny midpoint fixing. The DXY index remains underpinned above 96.000, but equally toppy around 96.500 with moves largely emanating from basket components and pairings on the back of Try/EM fluctuations. Indeed, the DXY and broad Usd traded down to lows when the Lira was around 6.4000 peaks, but then bounced after the latest  speech from Turkish President Erdogan as the Try lost momentum.

In commodities, the oil market is benefitting from the return to a positive risk tone and has erased the previous sessions losses, with both WTI and Brent up ~0.8% on the day, with traders looking ahead to the latest API release with expectations set to show a draw in Crude by 3.27mln, Distillates to build by 0.9mln and Gasoline to draw by 0.8mln. In the metals scope, Gold is flat whilst copper has fallen for the third day straight and pushed YTD losses to 16% as  poor Chinese retail sales data suggests demand could slow from the Asian country. Silver (+0.7%), platinum (+0.9%) and palladium (+0.1%) were all beneficiaries of the improved risk sentiment, however, with all of the precious metals up on the day.

Looking at the day ahead, in Europe, we get Q2 employment data in France, revisions to Q2 GDP for Germany and the Euro area, the final July CPI revisions for Germany, France and Spain, June employment data for the UK, June industrial production for the Euro area and the August ZEW expectations survey for Germany. In the US, we get the July NFIB small business optimism index, import price index and export price index. Home depot will also be releasing its earnings.

US Event Calendar

  • 6am: NFIB Small Business Optimism, est. 106.8, prior 107.2
  • 8:30am: Import Price Index MoM, est. 0.0%, prior -0.4%; Import Price Index ex Petroleum MoM, est. 0.05%, prior -0.3%
  • 8:30am: Import Price Index YoY, est. 4.45%, prior 4.3%; Export Price Index MoM, est. 0.2%, prior 0.3%
  • 11am: New York Fed to Release Q2 2018 Household Debt & Credit Report

DB’s Jim Reid concludes the overnight wrap

China’s main monthly data releases were all softer than expected, partly weighed down by trade tension and deleveraging efforts. The July retail sales came in at 8.8% yoy (vs. 9.1% expected) while industrial production (6.0% yoy vs. 6.3% expected) and fixed assets investment (5.5% yoy vs. 6% expected) also missed. Notably the Shanghai
Comp. rebounded from session lows post the data but has since declined back to be c0.5% lower. Meanwhile equities in Asia are broadly higher as the Turkish Lira is broadly stable overnight with the Nikkei (+1.80%) and Kospi (+0.51%)
both up while the Hang Seng is down c0.9%. Elsewhere Reuters noted that at the request of the Turkish ambassador, the US National Security adviser John Bolton has met with him to discuss Turkey’s detention of American pastor. As per unnamed US officials, the US has not set a deadline for Mr Brunson’s release but Bloomberg reports that the US have said there is nothing to discuss or negotiate until the pastor is freed.

Indeed the situation in Turkey continues to dominate financial markets. The lira fell another -6.56% yesterday to 6.88 per dollar (now c6.91). Recall that the Turkish currency traded as strong as 3.73 per dollar earlier this year, but is now nursing year-to-date losses of -45.0%. While the depreciation trend continues for the lira, the pace of the move has at least decelerated especially as it was trading north of 7.20 in the Asian session on Monday. The same cannot be said for assets more directly linked to the sovereign. Five-year CDS spreads rose 105 basis points to 565.0, their highest level since November 2008. This may signal growing concern that a currency crisis may morph into a sovereign solvency crisis in the medium term even though it’s the private sector that’s far more indebted.

Yields on domestic Turkish government debt continued to rise as well with 10-year yields hitting a new all-time high of 21.5%. Other emerging market assets were also under pressure, with the MSCI EM index down 1.8%, the Bloomberg EM USD aggregate index OAS up 15 bps to a multi-year high, and several currencies under pressure. The Argentina peso eclipsed its all-time weakest levels versus the dollar, while the South African rand and Colombian peso shed 2.31% and 2.13% respectively. Asian currencies have been more stable, as Chinese policymakers have kept the yuan flat against their trade-weighted basket lately, relieving the pressure on neighbouring countries. In fact general concerns over the weakness in the Yuan a few weeks ago now looks quite parochial after the scale of some of the more recent EM moves.

During yesterday’s trading session, the lira experienced pronounced volatility as news trickled out of Ankara. The central bank promised “to take all necessary measures” to address the crisis, but this did little to impress investors, who are looking for more substantive policy actions. Policymakers basically have three options to support the currency: 1) enact capital controls to prevent investors from selling lira, 2) expend reserves to directly support the lira, or 3) tighten domestic liquidity to make it more expensive to position against the lira and to discourage further outflows. Option 1 would be poorly received by markets, and President Erdogan has insisted that he remains committed to open markets. At the market open yesterday, the lira weakened as much as 12% versus the dollar, but retraced sharply after the central bank announced, around 6:20am London time, the provision of new dollar liquidity to the financial system and thus essentially deploying option 2 discussed above. The currency was soon trading back close to flat and at its strongest point intraday, but subsequently depreciated another 9% as investors digested the announcement. Instead of implementing option 3 from above as well, policymakers did not open their main liquidity window, the 1-week repo auction. This has the effect of pushing the average cost of funds higher via tighter liquidity, but it is unorthodox and a poor substitute for actual rate hikes.

Volatility continued around 13:00 London time, as media outlets (Bloomberg) reported that Turkey was preparing to release American pastor Brunson from house arrest. The lira rallied almost 5% immediately, but retraced sharply after officials denied any such developments. This seesawing price action indicates the fragility of the situation, and also demonstrates how political developments will be key to resolving the situation. If Brunson is released we will likely have a huge relief rally for a period of time. However it’s unlikely to solve the full suite of problems the country now faces.

Following on, DB’s EM Chief Economist Kubilay Ozturk has published a timely note looking at the key issues impacting Turkey via a succinct Q&A format. He looks at: i) why the marginal impacts of US sanctions on Turkish assets are so high? ii) how will the Turkish economy be affected from a lower Lira? iii) impacts from the latest initiatives by Turkish authorities and iv) potential scenarios going forward.

Moving on from Turkey, we want to quickly highlight yesterday’s DB HouseView (which I’m now in charge of) one-pager on the ongoing “Trade War” situation. A lot has happened in recent months on this front and a lot more is still pending. While we acknowledge that the topic is well written about, the fluidity of ‘Trade war’ related headlines makes it difficult to follow the status of where we stand with regards to different tariffs measures, retaliations and the numbers behind them. With this in mind, we have put together this one page infographic note highlighting (i) the status of different tariff measures announced so far (ii) the retaliatory push back (iii) room for further escalations (iv) potential macroeconomic impacts and (v) the most recent rhetoric. In this note , we also provide links to various DB research reports by our economists, strategists, and analysts across different regions covering this topic.

Developed market assets followed emerging markets lower during yesterday’s trading. The S&P 500 closed 0.40% lower, with cyclical sectors leading declines. The energy and materials sectors closed -1.20% and -1.04%, respectively, as oil experienced intraday volatility. Brent crude fell as much as 2.48% before retracing to close near flat. Safe haven equity sectors outperformed, with utilities gaining 0.09%. The Dow and Nasdaq indexes shed 0.50% and 0.25% as well.

Treasury yields and the dollar closed flat for the most part, with most emerging market currencies losing value and some safe havens (e.g. the yen and Swiss franc) gaining versus the greenback. The VIX index continued to tick higher, rising 1.62 points to 14.78. We do not expect US financial conditions to be materially affected by the stresses in Turkey and other emerging markets, but it is noteworthy that fed funds futures markets have, over the last two trading days, removed 6 basis points of hikes from the implied end-2019 policy rate.

The dynamic was similar yesterday in Europe. The V2X equity implied volatility index rose 0.83 points to 15.94, while the Euro Stoxx 600 index shed 0.25%. Cyclical sectors underperformed, with financials leading declines. The euro banks index closed at its lowest level since December 2016, as investors anticipated a potential earnings hit to Turkey-exposed institutions. The healthcare industry also lagged, largely due to Bayer’s 10.8% decline after a California court fined Monsanto (recently acquired by Bayer pending regulatory approval) $239 million over damages from a popular weedkiller Glyphosate. Notably around 2-3% of group earnings come from the weedkiller, so the court case may  represents a potential headwind for future profitability.

As for data, there were limited releases yesterday in Europe and the US. The final reading for Italy’s July CPI was confirmed at 1.9% yoy. Looking at the day ahead, in Europe, we get Q2 employment data in France, revisions to Q2 GDP for Germany and the Euro area, the final July CPI revisions for Germany, France and Spain, June employment data for the UK, June industrial production for the Euro area and the August ZEW expectations survey for Germany. In the US, we get the July NFIB small business optimism index, import price index and export price index. Home depot will also be releasing its earnings.

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Turkey To Boycott iPhones And US Electronic Goods, Erdogan Vows

As the war of words between the US and Turkey escalates, several hours after John Bolton warned Turkey’s ambassador that the U.S. has nothing further to negotiate until detained American pastor Brunson is freed, on Tuesday Turkish President Recep Tayyip Erdogan vowed to boycott American electronic products in response to Washington’s economic pressure against Ankara.

“There is an economic attack against Turkey. Earlier such things were done in secret, and now they are open to us. We can react in two ways: economically and politically,” Erdogan said in his latest defiant speech in Ankara Tuesday, warning that those who wage “economic warfare” against Turkey will pay a price and adding that the Turkish nation “won’t go down, it will stand firm on its feet.”

“Our Ministry of Finance and the Treasury are working day and night…We will boycott America’s electronic products. They have iPhones, but on the other hand there are Samsungs. We have our local brand Venus Vestel [a Turkish smartphone brand], we will use it,” the Turkish president added, sending the stock of Vestel Elektronik surging.

Erdogan’s statement indicates that for the first time since the diplomatic crisis with the US began, Erdogan is playing “his own Trump economic card.”  With more than 82 million people and a population growth that surpasses pretty much all European countries, Turkey is a big market and will only get bigger, BBG’s Onur Ant notes. So his point on iPhones had an internal coherence to it, just like Erdogan said here:

“There is a price we’re paying for the period we’re in. But there will be a price” those who’re waging an economic warfare against Turkey will also pay.

Of course, with the lira plunging, the boycott may be a moot point: with Turkish purchasing power dropping, that’ll probably send more people to local brands anyway. According to Bloomberg, an iPhone X in Turkey starts at about 7,500 liras. That’s about 5x the minimum wage, and will probably be adjusted upwards even more to account for the exchange rate.

As Bloomberg adds, if Erdogan’s boycott of U.S. goods indicates no quick repair in U.S.-Turkey ties, then Turkey should brace for more sanctions: “the U.S. has a list of individuals and companies to target if Turkey doesn’t release Pastor Andrew Brunson from jail.”

Erdogan also repeated his appeal to Turks to convert their dollars immediately to liras, adding that “we’ll be surrendering if we convert liras to FX.” He’s been repeating the same plea since Dec. 2016; since then the lira has lost about 46%.

The Turkish president said he had been taking necessary measures regarding the economy, amid a slide in the lira currency exacerbated by the dispute with Washington, but it was important to keep a firm political stance. Switching to foreign currency would mean giving in to the enemy, Erdoğan added.

“Turkey has one of the most solid banking systems in the world in all respects,” Erdogan said during a symposium in Ankara to mark the 16th anniversary of the ruling Justice and Development Party’s (AKP) foundation.

“We can do two things; one in economy, the other in politics. We have taken measures that economy needs and we will keep doing it … What is more important, I think, is keeping our political stance strong,” he added.

“What is this you’re doing?” Erdogan asked, referring to the US. “What is it that you are trying to accomplish? What do you want to do? You should know that the character of this nation is not one that wavers.”

Separately, Turkish Airlines has announced it will stop advertising American products on its flights, authorities in Ankara said.

Curiously, despite a modest dip, the lira, bonds and equities are standing surprisingly strong given Erdogan’s comments do not signal de-escalation of tensions, having soared over 5% earlier.

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Multiple Injured After Car Rams London Parliament Barriers In Terrorist Attack

Two people were injured when a car drove into security barriers outside the British parliament on Tuesday and the driver – a man in his 20s – was arrested, emergency services said, with counter-terrorism police leading the investigation into the incident which is being treated as a terrorist incident.

Television pictures from the incident showed armed police surrounding a silver saloon car that had hit heavy barriers outside St. Stephen’s Gate, the main public entrance to Parliament. Its hood was crumpled and its airbags had been deployed.

London’s Ambulance Service said it had treated two people for injuries at the scene and they had been taken to hospital. Neither of those hurt were believed to have suffered serious injuries and police said they were trying to piece together what had happened.

“At this stage, we are treating this as a terrorist incident,” the Metropolitan Police said in an emailed statement. The driver of the car, a man in his late 20s, was arrested on suspicion of terrorist offenses, the police said.

“While we are keeping an open mind, the Met’s Counter-Terrorism Command is leading the investigation into the #Westminster incident,” London’s Metropolitan Police said on Twitter.

Earlier, police said the male driver of the car had been arrested at the scene of the crash which occurred at 0637 GMT.

Quoted by Reuters, witness Jason Williams said the car had struck a barrier on a lane used for access to the parliament building with force. He said he thought it was deliberate.

“It’s a very serious incident,” he told reporters. “There was smoke coming from the vehicle.”

Images shot by a Euronews journalist showed police pointing their guns at a vehicle. Footage on social media showed a handcuffed man being led away by heavily armed police. Other footage showed a cyclist lying on the street.

“I saw the cyclists, injured cyclists. I’ve seen people, about 10, on the road, lying down, but I haven’t seen any fatalities,” Williams said.

Westminster Underground station, close to parliament, was closed to the public and the building cordoned off.

Parliament is in summer recess and most lawmakers are not using the building. Prime Minister Theresa May is on holiday abroad.

This is the latest attack on high profile London landmarks: in March 2017, Khalid Masood, 52, killed four people on nearby Westminster Bridge before he stabbed to death an unarmed police officer in the grounds of parliament. He was shot dead at the scene. It was the first of five attacks on Britain last year which police blamed on terrorism.

Britain is on its second highest threat level of “severe”, meaning an attack by militants is considered highly likely.

Last week, a Muslim convert admitted plotting to kill more than 100 people by driving a truck into pedestrians on London’s Oxford Street, the capital’s major shopping thoroughfare.

In October last year, 11 people were injured when a car collided with pedestrians near London’s Natural History Museum, raising fears of an attack, but police later said the incident was a road traffic accident.

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Is This The Most Important Geopolitical Deal Of 2018?

Authored by Olgu Okumus via Oilprice.com,

The two-decade-long dispute on the statute of the Caspian Sea, the world largest water reserve, came to an end last Sunday when five littoral states (Russia, Iran, Turkmenistan, Kazakhstan and Azerbaijan) agreed to give it a special legal status – it is now neither a sea, nor a lake.

Before the final agreement became public, the BBC wrote that all littoral states will have the freedom of access beyond their territorial waters, but natural resources will be divided up. Russia, for its part, has guaranteed a military presence in the entire basin and won’t accept any NATO forces in the Caspian.

Russian energy companies can explore the Caspian’s 50 billion barrels of oil and its 8.4 trillion cubic meters of natural gas reserves, Turkmenistan can finally start considering linking its gas to the Turkish-Azeri joint project TANAP through a trans-Caspian pipeline, while Iran has gained increased energy supplies for its largest cities in the north of the country (Tehran, Tabriz, and Mashhad) – however, Iran has also put itself under the shadow of Russian ships.

This controversy makes one wonder to what degree U.S. sanctions made Iran vulnerable enough to accept what it has always avoided – and how much these U.S. sanctions actually served NATO’s interests.

If the seabed, rich in oil and gas, is divided this means more wealth and energy for the region. From 1970 until the dissolution of the Soviet Union (USSR) in 1991, the Caspian Sea was divided into subsectors for Azerbaijan, Russia, Kazakhstan and Turkmenistan – all constituent republics of the USSR. The division was implemented on the basis of the internationally-accepted median line.

After the dissolution of the Soviet Union, the new order required new regulations. The question was over whether the Caspian was a sea or a lake? If it was treated as a sea, then it would have to be covered by international maritime law, namely the United Nations Law of the Sea. But if it is defined as a lake, then it could be divided equally between all five countries. The so-called “lake or sea” dispute revolved over the sovereignty of states, but also touched on some key global issues – exploiting oil and gas reserves in the Caspian Basin, freedom of access, the right to build beyond territorial waters, access to fishing and (last but not least) managing maritime pollution.

The IEA concluded in World Energy Outlook (WEO) 2017 that offshore energy has a promising future. More than a quarter of today’s oil and gas supply is produced offshore, and integrated offshore thinking will extend this beyond traditional sources onwards to renewables and more. Caspian offshore hydrocarbon reserves are around 50 billion barrels of oil equivalent (equivalent to one third of Iraq’s total oil reserves) and 8.4 trillion cubic meters of gas (almost equivalent to the U.S.’ entire proven gas reserves). As if these quantities were not themselves enough to rebalance Eurasian energy demand equations, the agreement will also allow Turkmenistan to build the Trans-Caspian pipeline, connecting Turkmenistan’s resources to the Azeri-Turkish joint project TANAP, and onwards to Europe – this could easily become a counter-balance factor to the growing LNG business in Europe.

Even though we still don’t have firm and total details on the agreement, Iran seems to have gained much less than its neighbors, as it has shortest border on the Caspian. From an energy perspective, Iran would be a natural market for the Caspian basin’s oil and gas, as Iran’s major cities (Tehran, Tabriz, and Mashhad) are closer to the Caspian than they are to Iran’s major oil and gas fields. Purchasing energy from the Caspian would also allow Iran to export more of its own oil and gas, making the country a transit route from the Caspian basin to world markets. For instance, for Turkmenistan (who would like to sell gas to Pakistan) Iran provides a convenient geography. Iran could earn fees for swap arrangements or for providing a transit route and justify its trade with Turkey and Turkmenistan as the swap deal is allowed under the Iran-Libya Sanctions Act (ILSA, or the D’Amato Act).

If the surface water will be in common usage, all littoral states will have access beyond their territorial waters. In practical terms, this represents an increasingly engaged Russian presence in the Basin. It also reduces any room for a NATO presence, as it seems to be understood that only the five littoral states will have a right to military presence in the Caspian. Considering the fact that Russia has already used its warships in the Caspian to launch missile attacks on targets within Syria, this increased Russian presence could potentially turn into a security threat for Iran.

Many questions can now be asked on what Tehran might have received in the swap but one piece of evidence for what might have pushed Iran into agreement in its vulnerable position in the face of increased U.S. sanctions. Given that the result of those sanctions seems to be Iran agreeing to a Caspian deal that allows Russia to place warships on its borders, remove NATO from the Caspian basin equation, and increase non-Western based energy supplies (themselves either directly or indirectly within Russia’s sphere of geopolitical influence) it makes one wonder whose interests those sanctions actually served?

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Report Signals UK Housing Bubble Bust: “Home Values Fell For The Fifth Straight Month”

According to the latest numbers from Acadata Ltd., a housing bubble in the UK is steadily deflating due to the economic uncertainties surrounding Brexit, along with tighter monetary conditions via the Bank of England, which could alleviate lingering affordability issues.

British home values fell for the fifth straight month in July, the longest stretch of declines since the global financial crisis, reported Bloomberg. The ongoing slide in prices, however, has a silver lining to the millennials who have been priced out: homes are becoming more affordable.

Home values fell 0.2 percent from June, bringing the average price for a home to 302,251 pounds ($386,000), Bloomberg said quoting a recent Acadata report.

London remains a “mixed picture” the report said, with the number of sales in the second quarter plunging by 7 percent from the prior year and prices declining in about two-thirds of the capital’s boroughs.

After a three-decade Central Bank credit-induced boom, the British housing market is weakening amid slower economic growth, spurred by uncertainties from Brexit and inflation outpacing wage growth in the last several years.

Bloomberg notes London has taken the brunt of the economic storm, where the average home price is more than double the national average.

“At the national level, annual price growth has decelerated to 1.6 percent, the least in six years, and sales have declined by 6 percent on a seasonally adjusted basis,” Acadata said.

The report also specified that the latest Bank of England’s interest-rate hikes would further reduce housing market activity.

Separately, Albert Edwards, an economist from the French investment bank Société Générale, commented on the UK housing bubble, which he told Sputnik — prices could decline by as much as 12 percent as the property bubble deflates.

Edwards said the Bank of England’s relentless money printing over the past decade (with base interest rates at a zero lower bound) had driven debt-fuelled demand for housing.

“What you are doing is lending them more money, backed by the taxpayer, to push up house prices even more,” Edwards said.

As Brexit is likely slated for March 2019, along with more rate hikes from the Central Bank, it seems the days of easy money policies are over which could stave off the debt-fueled demand that had created the housing bubble.

Bloomberg also referenced a recent report from Visa and IHS Markit showed that consumer spending slipped 0.9 percent in July from last year.

“It seems unlikely that expenditure trends will improve in the near term,” said Annabel Fiddes, principal economist at IHS Markit. “Expenditure trends have been relatively subdued in 2018 so far, which can be linked in part to disappointing growth in real earnings despite a tight labor market, while the recent interest-rate hike by the Bank of England is likely to add further pressure on households’ budgets.”

To sum up, the bust cycle of the UK housing bubble is just beginning – suggesting now is the time to sell at the peak, while millennials who have been deprived of an affordable home might have a chance of homeownership in the future once the bust cycle troughs.

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Brickbat: Start Spreading the News

Bill DeBlasioAfter New York City Mayor Bill De Blasio helped kick off the Dominican Day Parade, a reporter asked him a question about a recent story about his administration’s ties to lobbyists. Instead of answering, De Blasio just watched as police officers grabbed the reporter and led him half a city block away.

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The US-Turkey Crisis: The NATO Alliance Forged In 1949 Is Today Largely Irrelevant

Authored by Philip Giraldi via American Herald Tribune,

There has been some reporting in the United States mass media about the deteriorating relationship between Washington and Ankara and what it might mean. Such a falling out between NATO members has not been seen since France left the alliance in 1966 and observers note that the hostility emanating from both sides suggests that far worse is to come as neither party appears prepared to moderate its current position while diplomatic exchanges have been half-hearted and designed to lead nowhere.

The immediate cause of the breakdown is ostensibly President Donald Trump’s demand that an American Protestant minister who has lived in Turkey for twenty-three years be released from detention. Andrew Brunson was arrested 21 months ago and charged with being a supporter of the alleged conspiracy behind the military coup in 2016 that sought to kill or replace President Recep Tayyip Erdogan.

Erdogan has asserted that the coup was directed by former political associate Fetullah Gulen, who lives in exile in Pennsylvania, but has produced little credible evidence to support that claim. In the aftermath of the coup attempt, Erdogan has had himself voted extraordinary special powers to maintain public order and has arrested 160,000 people, including 20 Americans, who have been imprisoned. More than 170,000 civil servants, teachers, and military personnel have lost their jobs, the judiciary has been hobbled, and senior army officers have been replaced by loyalists.

Gulen is a religious leader who claims to promote a moderate brand of Islam that is compatible with western values. His power base consists of a large number of private schools that educate according to his curriculum, with particular emphasis on math and sciences. Many of the graduates become part of a loose affiliation that has sometimes been described as a cult. Gulen also owns and operates a number of media outlets, all of which have now been shut by Erdogan as part of his clamp down on the press. Turkey currently imprisons more journalists than any other country.

It is widely believed that Erdogan has been offering to release Brunson in exchange for Gulen, but President Donald Trump has instead offered only a Turkish banker currently in a U.S. prison while also turning the heat up in the belief that pressure on Turkey will force it to yield. Washington began the tit-for-tat by imposing sanctions on two cabinet-level officials in Erdogan’s government: Interior Minister Suleyman Soylu and Justice Minister Abdulhamit Gul. Ankara has now also been on the receiving end of a Trump tweet and tariffs have been placed on a broad range of Turkish products, to include steel and aluminum.

The view that economic pressure will force the Turks to yield could be mistaken and demonstrates that the Administration does not include anyone who knows that Americans have been unpopular in Turkey since the Gulf War. The threats from Washington might actually rally skeptical and normally pro-western Turks around Erdogan but U.S. sanctions have already hit the Turkish economy hard, with the lira having lost 40% of its value this year and continuing to sink rapidly. Foreign investors, who fueled much of Turkey’s recent economic growth, have fled the market, suggesting that a collapse in credit might be on the way. Those European banks that hold Turkish debt are fearing a possible default.

It is a spectacle of one NATO member driving another NATO member’s economy into the ground over a political dispute. Erdogan has responded in his autocratic fashion by condemning “interest rates” and calling for an “economic war” against the U.S., telling his supporters to unload all their liquid valuables, gold and foreign to buy the plummeting lira, a certain recipe for disaster. If they do that, they will likely lose everything.

Other contentious issues involved in the badly damaged bilateral relationship are conflicting views on what to do about Syria, where the Turks have a legitimate interest due to potential Kurdish terrorism and are seeking a buffer zone, as well as Ankara’s interest in buying Russian air defense missile systems, which has prompted the U.S. to suspend sales of the new F-35 fighter. The Turks have also indicated that they have no interest in enforcing the sanctions on Iran that were re-imposed last week and they will continue to buy Iranian oil after the November 4th initiation of a U.S. ban on such purchases. The Trump Administration has warned that it will sanction any country that refuses to comply, setting the stage for a massive confrontation between Washington and Ankara involving the Turkish Central Bank.

In terms of U.S. interests, Turkey, which has the second largest army in NATO, is of strategic value because it is Muslim, countering arguments that the alliance is some kind of Christian club working to suppress Islam in the Middle East. And it is also important because of its geographic location close to hot spots where the American military is currently engaged. If the U.S. heeds Trump’s call to cut back on involvement in the region, Turkey will become less valuable, but currently, access to the Incirlik Airbase, near Adana and the Syrian border, is vital.

Indeed, Incirlik has become one of the flashpoints in the argument with Washington. Last week, a group of lawyers connected politically to Erdogan initiated legal action against U.S. officers at Incirlik over claimed ties to “terrorists” linked to Gulen. The “Association for Social Justice and Aid” has called for a temporary halt to all operations at the base to permit a search for evidence. The attorneys are asking for the detention of seven named American Colonels and Lieutenant Colonels. General Joseph Votel, head of U.S. Central Command based in Germany is also cited. If the lawyers are successful in court, it will mean a major conflict as Washington asserts the rights of the officers under the Status of Forces Agreement, while Turkey will no doubt insist that the Americans are criminals and have no protection.

Another trial balloon being floated by Erdogan is even more frightening in terms of the demons that it could be unleashing. Abdurrahman Dilipak, an Islamist columnist writing in the pro-government newspaper Yeni Atik, has suggested that there might well be a second terrorist attack on the United States like 9/11. Dilipak threatened that if Trump does nothing to reduce tension “…some people will teach him [to do] that. It must be seen that if internal tensions with the United States continue like this that a September 11 is no unlikely possibility.” Dilipak also warned that presumed Gulenist “U.S. collaborators” inside Turkey would be severely punished if they dared to go out into the streets to protest in support of Washington.

If recent developments in Turkey deteriorate further it might well suggest that Donald Trump’s instinct to disengage from the Middle East was the right call, though it could equally be seen as a rejection of the tactic being employed, i.e. using heavy-handed sanctions and tariffs to compel obedience from governments disinclined to follow Washington’s leadership. Either way, the Turkish-American relationship is in trouble and increasingly a liability for both sides, yet another indication that the NATO alliance forged in 1949 against the Soviet Union is today largely irrelevant.

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