14 September 2018

Katie Stanton

14 September 2018

Good Morning

One of the world’s most charismatic and controversial leaders has been defied this week as Turkey’s central bank finally acted to raise interest rates to 24%. The move was long overdue after the lira hit rock-bottom and inflation reached 18% in August, causing widespread financial ruin.

The country’s president, Recep Erdogan, brings an unorthodox perspective to the subject, citing high interest rates as a cause of inflation, a “tool of exploitation” and the “mother and father of evil”. This is contrary to the perceived macroeconomic wisdom, which holds that inflation will ease as interest rates increase.

Erdogan’s response to the naysayers is indicative of his political approach more generally: “If you are saying the opposite, my friend, you don’t understand the issue”. In one moment he insists that the central bank is an independent institution, free from interference and political meddling. In the next, he rages publicly at the bank’s actions, urging it to drop interest rates.

Ultimately, though, Erdogan blames external factors for the plight of the Turkish economy. A row with President Trump saw tariffs double on US imports of Turkish steel and aluminium, a move designed to force the release of Andrew Brunson, an American pastor jailed in Turkey following the coup attempt in 2016. Erdogan claims that the US is waging “economic war” against Turkey, arguing that their “issue is Islam.” While tariffs have undoubtedly hit the Turkish economy, the roots of the country’s problems go much, much deeper.

 As in so many other emerging markets, economic meltdown is accompanied by political chaos and failing democracy. Erdogan has a tight grip on institutions – political and otherwise – particularly following the recent election in which he pledged to take greater control of monetary policy. He recently appointed himself chairman of Turkey’s sovereign wealth fund, which controls assets worth $200 billion. As Erdogan pushes to dominate all aspects of Turkish life, investors grow increasingly wary. 

Yet, policymakers are oblivious: Mustafa Sentop, deputy Speaker of the Turkish parliament, announced that he “doesn’t believe the country will have a problem funding” the $179 billion in foreign debt that will mature during the next year. Maybe now that the central bank has asserted its independence by challenging the more eccentric economic policies espoused by Erdogan, that belief will be fulfilled.

News

The “storm of a lifetime” has started to lash the east coast of the US, with officials warning it has the capacity to “kill a lot of people”. Hurricane Florence brought sea surges and heavy winds last night as more than 100,000 homes lost power in North Carolina. The storm is larger than expected, although the winds dipped to 90mph and it was downgraded for a third time. About 1.7 million people were ordered to leave their homes on the coast of the Carolinas and Virginia, but officials fear that many will stay in light of the recent downgrading.

Bank of England governor Mark Carney warned yesterday that a no-deal Brexit would cause house prices to crash, telling Theresa May’s cabinet that house prices would fall by 35% over three years. Carney was accused of “gloom and despondency” by both Remainers and Leavers who argued that he had not taken into account the steps the government would take to counteract the effects of a no-deal Brexit. This comes days after the governor agreed to stay at the Bank of England until 2020. (£)

The two suspects in the Salisbury novichock attack have appeared on the state-funded TV channel Russia Today to claim that they were only visiting the UK as tourists. This, their first interview since they were charged in the UK with the attempted murder of Russian ex-spy Sergei Skripal, saw the men claim that their “friends had suggested for a long time that [they] visit this beautiful city”. They admitted that they were the men in the CCTV images, but say that they had gone to visit Salisbury cathedral and its famous clock.

Business & Economy 

Ross McEwan, chief executive of the Royal Bank of Scotland, has been accused of purposefully withholding “information of relevance and interest” when he was questioned by the Treasury select committee in January about the bank’s Global Restructuring Group. Following a report by The Times in July, allegations of bribery between 2014 and 2016 are currently subject to a criminal investigation by Police Scotland. Mr McEwan “entirely reject[s] the suggestion” that he deceived MPs and claims that he failed to mention the information as “allegations did not relate to any of the issues that the FCA has been considering”. (£) 

Volkswagen announced yesterday that it is ending the production of its iconic Beetle car in 2019. Sales in the US have fallen in recent years, as people look to buy larger cars. The company has been reviewing options for electric vehicles and a possible revamp of the model, before the decision was made to end production at its plant in Mexico next July. 

According to a survey by the Bank of England, businesses believe that Brexit will reduce their export prospects rather than help them. This is in spite of promises by politicians to turn the UK into a free-trading business hub. Companies are preparing for the worst as exporters put the probability of foreign sales being damaged at 40%. This news comes as the Bank held rates at 0.75% and upgraded its outlook for both wages and growth, a move that points to gathering momentum of economic growth in the UK. (£)

Markets

What happened yesterday?

The FTSE 100 closed lower yesterday following a sell-off in tobacco and oil stocks. This was exacerbated by a jump in the pound. The index ended down 0.4% at 7,281.57. David Madden of CMC Markets commented: "British American Tobacco and Imperial Brands have given back some of yesterday’s gains, and Royal Dutch Shell and BP are in the red on account of the weaker oil price, as Hurricane Florence has been downgraded to a category two storm."
 
Meanwhile, US stocks pushed higher with the S&P 500 up 0.5% as the technology sector bounced back. A tweet by Donald Trump muddying the prospects for US-China trade talks has had little effect on markets and Asia-Pacific stocks remain buoyant. Weaker than expected US consumer price inflation, up 2.2% year-on-year, pushed the dollar and longer-dated Treasury yields lower last night, but they had recovered by the morning.
 
Oil prices dropped after Brent crude climed above $80 a barrel amid concerns over Iran sanctions and the potential fallout of Hurricane Florence.
 
On the currency markets, the pound was up against the dollar 0.43% at $1.31 and down 0.08% against the euro at €1.12. Meanwhile, Turkey’s interest rate hike boosted currency in emerging markets.

Finals              
Wetherspoon (J.D.)

Interims          
PV Crystalox Solar
RM2 International S.A. (DI)
Triple Point Social Housing Reit
Spire Healthcare Group

Trading Announcements
Avon Rubber
Investec
SThree

AGMs
Atlantis Japan Growth Fund Ltd.
Henderson Smaller Companies Inv Trust
Invesco Income Growth Trust
Omega Diagnostics Group
SVM UK Emerging Fund

Intl. Economic Announcements
(10.00) Balance of Trade (EU)
(13.30) Import and Export Price Indices (US) 
(13.30) Retail Sales (US)
(14.15) Capacity Utilisation (US)
(14.15) Industrial Production (US)
(15.00) Business Inventories (US)
(15.00) University of Michigan Confidence (Prelim) (US)

Columns of Note

Kim Gittleson, writing from New York for the BBC, claims that in the decade since the recession “American women have had 4.8 million fewer babies than demographers were expecting”. It is thought that the financial insecurity caused by the recession led women to delay starting a family. Additionally, it is said that the 2008 financial crisis has created a generation with trust issues both in the stock market, institutions and every day life more generally. 

Josephine Bartosch weighs in on Labour’s refusal to accept the definition of a woman in The Spectator this week. A billboard emblazoned with the words “Woman; wʊmən/(noun) adult human female” will be placed in Liverpool city centre by campaign group ‘Standing for Women’ ahead of the Labour Party Conference. This is in response to the shadow equalities minister Dawn Butler MP, who sees trans women as women, championing the inclusion of transgender women on the Labour Party’s all-women shortlists. Bartosch poses that any effort to protect women will “become meaningless if men can ‘identify’ as women on the basis of subjective feelings”. (£)

Did you know?

In the Norwegian town of Longyearbyen it is illegal to die as it is too cold for buried bodies to decompose. 

Parliamentary highlights

TODAY

House of Commons

No business scheduled

House of Lords

No business scheduled

Scottish Parliament

No business scheduled