14 Aug 2018

Scott Reid

14 Aug 2018

Good morning, 

President Recep Tayyip Erdogan: the most powerful man on his side of the Bosphorus, hammerer of the Kurds … and a modern day King Canute?

So say analysts at Société Générale who have likened the Turkish president to the ill-fated Danish king, for his fruitless efforts to avoid a “textbook currency crisis”. His has been a strategy straight out of the authoritarian’s playbook, and has included shifting the blame onto American “economic terrorists” and seeking out domestic “traitors”.  So far his rhetoric has failed to halt the lira's crash.

“Just as King Canute could not stem the waters by ordering the tide to stop, a country with a six per cent current account deficit and 15% inflation will be powerless to stop its bonds and currency sliding without hiking interest rates and/or restricting capital outflows.”

And so the Turkish economy now finds itself between a rock and a one-way ticket to the IMF as Nils Pratley suggests in The Guardian today. The numbers certainly indicate as much. The lira endured falls of up to 10% to hit record lows on the currency markets yesterday, having already shed 46% of its value since the start of 2018. And it's contagious, cracks are also appearing across emerging market economies.  Yesterday the Argentinian central bank reacted by raising interest rates by five per cent to 45% following a fall in the peso.

For now, in Turkey, President Erdogan seems bereft of any workable solution. Although a sharp interest rate rise could help support the lira for Turkish companies who mainly trade in dollars or euros, Erdogan has positioned himself as “the enemy of interest rates”, holding firm to his long-standing strategy of seeking cheap bank credit to drive the country’s growth.

A ‘textbook currency crisis’ perhaps, but also a classic case of the incompatibility between running an economy in the 21st century, the demands of the global marketplace and an authoritarian having his own way. Sure, there is nothing to suggest Erdogan will change tack, but a full-blown flop of the Turkish economy might force him to think otherwise.

News 

Conservative Brexiteers are reportedly drawing up plans to publish their own “positive” vision for a hard Brexit. Led by Jacob Rees-Mogg MP, the European Research Group will produce a policy paper setting out the benefits of the UK leaving the EU without a deal, instead reverting to WTO terms ahead of seeking a possible Canada-style free trade agreement. The proposal is expected to have the backing of between 60 and 80 Conservative MPs and will increase pressure on the PM ahead of the party conference in Birmingham in October. (£)

Jeremy Corbyn has admitted being present at a wreath laying ceremony in memory of the terrorist group who carried out the 1972 Munch Olympic Massacre. Following the release of footage depicting the Labour leader’s presence at the ceremony, Mr Corbyn has said he did attend, but did not “think” he was involved and was there in support of “ending all forms of terrorism”. (£)

The UK will have more than 9 million more pensioners within the next 50 years according to research released by the Office for National Statistics. The number of people aged over 65 will nearly double to more than 20 million by 2066, with the biggest increase in the over-85s group, which is expected to more than treble. Meanwhile, the number of people aged 16 to 64 is only expected to grow by five per cent. (£)

Veteran soul singer Aretha Franklin is said to be “seriously ill” on reports confirmed with Associated Press in her home city of Detroit that she is near the end of her life. The 76-year-old cancelled concerts earlier this year due to health concerns and has spent the last two months in hospital. 

Business & Economy 

Elon Musk has insisted he has the financial backing to take Tesla private through the support of Saudi Arabia. The founder and chief executive of Tesla posted a 1,108-word blog on the electric carmaker’s website suggesting he had “funding secured” and claimed that the anticipated $70 billion he would need had been overstated. The US Securities and Exchange Commission is currently investigating the accuracy of his tweet with two investors having launched lawsuits against Musk last week on claims that he falsified information. (£)

The founder of the Wetherspoons pub chain has said the company is looking at ways to replace all EU products in its stores in favour of British and non-EU alternatives. Tim Martin, who owns 30% of the company he launched in 1979, said his “back of envelope” estimates were that this would mean replacing about a fifth of all products. Mr Martin also said he has been put “in the firing line” by the negotiating tactics of the European Commission and EU.

Markets 

What happened yesterday?

The plummeting value of the Turkish lira continued to weigh heavily on investors in London yesterday, with travel and certain financial stocks bearing the worst of the burden. Despite gains in the insurance sector, this led the FTSE 100 to finish further in the red on last week’s closing performance - down 0.32% or 24.56 points at 7,642.45.

In corporates, travel operators TUI (down 2.49%) and Thomas Cook (down 2.90%) saw some of the day’s worst losses as investors weighed up shocks to their domestic supply chain in Turkey against limited gains for foreign tourists’ spending power. Shares in emerging markets-focussed asset manager Ashmore (down 5.43%) also fell, unsurprising given the fund manager’s reputation as London’s bellwether for the strength of the Turkish and Middle Eastern economies in particular.

Elsewhere, Esure was the day’s star performer.  The stock jumped on news that private equity giant Bain Capital had entered into talks to take the insurance provider private in a deal worth up to £1.2 billion. The bid took the rest of the non-life insurance sector along with it, with gains at Esure also benefitting Admiral Group (up 1.61%), Direct Line (1.49%) and Hargreaves Lansdown (up 1.43%).

Despite large gains against the lira, it was an otherwise mixed day for the pound. By close of trading, sterling was down 0.13% against the dollar at $1.27 and up 0.04% higher versus the euro at €1.12.

Finals
Falanz Group Ltd
 
Interims
Antofagasta
Apax Global Alpha Limited
Capital & Regional
esure Group
JPJ Group
Mears Group
Menzies(John)
Polypipe Group
Realm Therapeutics
Telecom Egypt SAE GDS (Regs)
Transgloble Energy Corporation NPV (DI)
Touchstone Exploration Inc NPV (DI)
 
Q2 Results
JPJ Group
Telecom Egypt SAE GDS (Regs)

 

Trading Announcements
Castings
 
AGMs
Castings
Gabelli Value Plus Trust
 
UK Economic Announcements
(09.30) Claimant Count Rate
 
Intl. Economic Announcements
(07:00) Consumer Price Index (GER) 
(07:00) GDP (Preliminary) (GER) 
(10:00) GDP (Preliminary) (EU) 
(10:00) Industrial Production (EU) 
(10:00) ZEW Survey (EU) - Economic Sentiment 
(10:00) ZEW Survey (GER) - Current Situation 
(10:00) ZEW Survey (GER) - Economic Sentiment
(13:30) Import and Export Price Indices (US)

Columns of Note 

Matthew Goodwin writes in Politico to suggest that Britain’s centrists have misdiagnosed the need for a new party in the liberal centre. Instead, Goodwin claims the party most voters want is on the hard right in the style of France’s Front National; in support of curbing immigration, introducing a harsher criminal justice system including restoring the death penalty, and committed to Britain’s unilateral exit from the EU.

Pointing to a less obvious indicator of economic woes in Turkey, Alistair Osborne uses his Times column to highlight the falling shares at DP Eurasia, the outfit that franchises Domino’s Pizza in Turkey. Following a 15% fall in shares yesterday, Osborne suggests President Erdogan’s strategy should be to raise interest rates where so far appeals to local investors to convert gold supplies into lira and a crackdown on “traitors” has failed to appease the markets.

Did you know? 

Positioned at 45°, ‘witch windows’ are almost exclusively found in the US state of Vermont. The term ‘witch window’ comes from the belief that witches cannot fly their broomsticks through tilted windows.

Parliamentary highlights 

House of Commons
In recess until 4 September 2018
 
House of Lords
In recess until 4 September 2018
 
Scottish Parliament
In recess until 4 September 2018