- CNBC.com – Turkish central bank hikes rates in a bid to save tumbling currency
Central Bank of Turkey increased its benchmark rate on Thursday to 24 percent, a hike of 625 basis points from the previous rate of 17.75 percent. The Turkish Lira jumped more than 5 percent on the news and firmed to beyond 6.1 against the dollar.
- Wall Street Journal – Turkey Takes Action on Strained Economy With Big Rate Rise
Turkey’s central bank says it will continue to use all of its monetary policy tools for price stability
Turkey’s central bank raised interest rates by more than 6 percentage points Thursday in a much-anticipated move to tackle its economic crisis, sending the embattled lira sharply higher against the dollar. - Financial Times – Turkish lira jumps against the dollar as central bank raises rates
Turkey’s central bank attempted to shore up the country’s sliding currency with a sharp increase in its benchmark lending rate, causing a jump in the lira that left it 5 per cent up on the US dollar from Wednesday’s closing level. Despite Turkish president Recep Tayyip Erdogan criticising high interest rates this morning, the central bank increased the one-week repo rate to 24 per cent, up from 17.75 per cent.
Summary
Rate hikes in Turkey might be a shot in the arm for emerging markets at a potent time. Global economic growth is at a potential inflection point and the ties between risk markets and industrial metals are the tightest in years.
Comment
The Central Bank of Turkey asserted its independence and delivered a potential shot in the arm for risk assets in both developed and emerging market economies. Global economic growth is at a potential inflection point with the global Citi Surprise index near a break above zero. As we highlighted in a post last week, emerging markets and industrial metals have seen sustained outperformance after past crosses above zero.
We talked about how industrial metals are seeing their strongest ties to risk asset performance in years. On August 28th we noted that 3-month correlations between the Bloomberg total return indices for six industrial metals and the S&P 500 were at their highest since 2016. The correlations for all six metals have risen further since.
Stronger ties between metals and global equities have spread beyond the materials sector. Among S&P 500 and emerging market sectors, emerging market consumer discretionary and S&P 500 energy have the strongest 3-month correlations to metals. The dispersion of correlations across the sectors is notably tighter, similar to the period between mid-2015 to mid-2016. That period was characterized by several concentrated risk-on / risk-off cycles.
One pivotal regional for global growth is Southeast Asia, where economic growth has fallen further below one-year averages than emerging markets more broadly. Both the surprise and economic data change indices have seen improvement in recent weeks, and like the global series, the surprise index is near a cross above zero.
Improving total returns in industrial metals would be a windfall for economic growth in Southeast Asia. The Bloomberg industrial metals index is -16% over the past quarter. The growth in the Asia Pacific region becomes much more favorable with even small improvements from these depths. The chart shows the distribution of changes in the APAC data change index over the following quarter at varying returns in the industrial metals index, using data since 2010. The average change in the pace of growth improves as the skew shifts toward positive outcomes.
Whether or not the region can sustain improvements in the pace of economic growth matters a great deal for the distribution of Asian EM fixed income performance. Back on July 19, we pointed out that the steep drop in industrial metals would knock economic growth lower over the next quarter, but not necessarily dent high yield performance. Bloomberg’s Asia high yield index is up over 1.2% since, although it is off late August highs.
The next chart shows how Bloomberg’s EM Asia total return bond index fared over the following quarter as the performance of industrial metals varies. We’ve split the columns to highlight the distributions when the APAC data change index fell (left, orange) and rose (right, blue) over the following 65 days. Regardless of how industrial well metals were able to rebound, a positive change in regional economic growth was worth roughly 50 bps in the median total return.