Mood music is definitely downbeat

February 1, 2010

Returning to the fold after a week marketing in the US, and the mood music is definitely downbeat at present as global markets face significant headwinds from a) Early exit strategies in Asia (China in particular); b) a sense of uncertainty on the policy front in the US, after Obama's surprise defeat in Mass, and the loss of his super majority - there is concern that this will lead to tighter fiscal policy in the short term (arguably good from a long term dollar perspective); c) Continuing problems in Euroland over how to manage the situation with Greece, d) and related to C, a palpable perception that events in Dubai and Greece over recent months just highlights that further shoes could drop as part of the global recovery process.

Global markets are certainly struggling to get much traction, albeit note herein the continuing out-performance from equity markets in Emerging Europe over the past few weeks, including by Turkey. Arguably the region (not Turkish equities) underperformed in 2009, and hence are not suffering as much from profit-taking as their global peers.

The EMBI+, meanwhile, is back over the 300 level, at 308, i.e. flat over the period through October, but a good 40bps above the year's lows; note herein that there is still a wad of new issuance in the pipeline which could still weigh. ABN Amro's benchmark TRY bond index is meanwhile, hovering around the 9% level, a good 150bps above the lows from late 2009, albeit it more or less ended flat on the week on Friday. Turkey 5Y CDS is around the 190bps mark, flat with Russia, but both are a good 30bps or so off their lows for the year.

(+/-) IMF MD Straus-Kahn more or less let the cat out of the bag last week by calling on Turkey to make up its mind how to proceed on the IMF front, and signalling that while the two sides are some 80-85% in agreement, differences remain. It does appear that the IMF is running out of patience now and wants Turkey to decide quickly what for the relationship will take, i.e. an actual programme, or merely standard surveillance. Perhaps worries over the market impact of Straus-Kahn's comments PM Erdogan indicated over the weekend that a deal was still possible; albeit we still view this as Plan B.

(*) The highlight/focus of the week will be on inflation data for January, released on February 3. The CBRT has warned in recent months that the first couple of prints in 2010 will be on the high side reflecting a number of factors, including: low base period effects, the adjustment upward of a range of taxes cut as part of the government's stimulus programme early in 2009, energy and non-processed food price inflation. Market expectations are for a 1.7-1.8% MOM inflation print in January, which given the 0.3% MOM increase posted in January 2009, would hence take the YOY rate to around the 8% mark, from just 6.5% in November, and indeed the year low of 5.08% in October. The CBRT though continues to argue (see its Inflation Report published last week) that inflation will remain muted over the medium term; no doubt herein they will feel the wide output gap (likely ~ 10%) will continue to weigh on price inflation, and that the spike in inflation expected over the next few months will prove temporary. Herein, they may well be helped by the strength/stability of the lira, particularly against the Euro, and also by our assumption that commodity prices will weaken over the course of 2010 as global stimuli are gradually taken off and as dollar strength returns as a theme globally. The CBRT has revised up its target for inflation for the end of 2010 to 6.9%, from 5.4% previously, albeit the revised forecast still lay within the tolerance range (5.5% - 7.5%) of the CBRT's target. Net-net, the CBRT is unlikely to move quickly to hike its policy rate, albeit note herein it will surely be watching inflationary expectations closely.

(*) The Treasury released its borrowing programme for the period February - April, 2010. For February, total debt service is TRY23.6bn, and TRY56bn for the period through April. For February, the Treasury plans to borrow TRY19.3bn, all thru the domestic market, with other financing of TRY4.3bn the latter assuming a primary surplus or draw down of funds in the cash reserve.