Focus On Central Banks: BOE, Fed, CBT

A better than expected GDP number in Japan and a surge to a 15 year high in the Nikkei 225 has had little influence on European markets this morning.

It seems that In the absence of central banker jawboning equity indices are lot more subdued with the likes of the DAX and the CAC 40 looking rather flat compared to yesterday’s bounce.

The prospect of the Federal Reserve minutes later this evening is likely hampering any real risk appetite. Many expect to see a degree of hawkishness but given that we’ve seen a fairly uninspiring set of data points from the US of late any real fears of imminent monetary tightening are probably embryonic.

Closer to home, the MPC official bank rate votes are due at 9.30am. With Britain’s inflation rate slipping below zero, futile as it may be, market participants will be looking for some clarity on future monetary policy. With UK 10-Year treasury yields still unable to gain a foothold above the 2% mark, it’s fairly evident that a balanced outlook is expected.

The gyrations and uncertainty in currency markets has not been without its victims. Burberry (LONDON:BRBY) , the biggest faller on the FTSE 100 this morning posted a 7% rise its full year pre-tax profit to £456m Despite being ahead of forecasts, the impact of the weaker euro and propulsion in Swiss Franc strength meant that company guidance for the new financial year would be about £40m lower than previous.

The share price is off its lows but have fallen some 10% since hitting an all-time high in late February. A move down through the 1700p level would likely escalate a sell- off.

The bad press related to its recent court case for travel operator Thomas Cook has not endeared it to investors and while the share price has seen a significant recovery from its 2012 lows, it remains trapped in an 8 year downtrend.

While the majority of brokers remain bullish on the stock, it has now reached its average target price of 157p. One would like to see a break above the 170p level to garner any real additional upside.

The Dow looks to open slightly softer. Down 17 points to 18295.

Turkey’s central bank gives policy verdict today and is broadly expected to leave the benchmark rate and the overnight corridor unchanged at its last MPC meeting before June 7 general election. If the consensus is the status quo, it is certainly because the CBT is given no option but to ease rates and the CBT will most likely – and hopefully – not exercise this option. Whereas an indicative 25-50 basis point hike on the upper band would have acted as a good safety net and a signal that the bank is ready to stand higher volatility, the political pressures from the ruling AKP government and the President Erdogan guarantee that an upside adjustment on rates is not even taken into consideration. Thanks to significant slide in oil prices, the inflationary pressures reversed before hitting the two-digit zone since mid-2014. However, the stabilisation in the oil market and the meaningful lira depreciation is beginning to show signs of deviation from the unusual down trend in headline inflation toward the CBT’s 5% target, and should, at some point, conflict with the CBT’s tenacity in its inappropriate low-rate policy.

Governor Basci’s side efforts to tighten the monetary conditions and support the lira – via ROMS, lower rates on euro and dollar deposits - will not be sufficient in term. The market is well aware of the risks of an aggressive lira unwind, however the carry returns have been very much sweet in the current low rate environment across the G10, especially with expectations that the Fed will not start normalizing its policy before December this year. Despite the current hunt for higher yields, the heavy inversion on the sovereign yield curve is the perfect illustration of dubious sentiment. Everyone knows: the CBT will need to readjust its rates sooner or later. The timing will depend on the outcome of the election and the market reaction.

Interestingly, this is the first time that the market-friendly scenario is not an outright AKP victory. A more balanced share of power is necessary to relieve concerns that the country may be dangerously shifting to a one-man-ruled system as diversification in monetary, fiscal and legal issues has seemingly become an emergency need. This is the only way to pull the long-term capital (investment) back in Turkey. AKP is right: lower rates are business friendly, but not when it leads to a volatile currency and instable prices. As the CBT is not given a choice to adjust its rates higher, only a weaker AKP power in the government could take the pressure off its shoulders. And only then, the CBT may ‘more independently’ decide to readjust its policy according to economic fundamentals. Otherwise, the market will be in charge of saying ‘stop’ (as it has been the case in January 2014), push the government aside and oblige the CBT to make a massive move to cool-off tensions.