Brexit and trade war talks take centre stage

This week financial markets remained highly sensitive to political and geopolitical developments with the China-US trade war and Brexit negotiations in the spotlight. Even though the so-called “phase one” trade deal looks more and more like a dud, market participants remained mostly bullish. After temporary weakness, S6P 500 futures resumed the upward trend. Across the Atlantic, hopes for a positive resolution of Brexit negotiations between the EU and the UK gave a boost to equities and the pound sterling. GBP/USD was able to consolidate last week’s spectacular gains – when it rose more than 4%, from 1.22 to 1.27 – and is now trading sideways around 1.2650 as negotiations will continue throughout the week.

In Switzerland, pharma stocks took a hit yesterday after US Trade Representative Robert Lighthizer suggested the US administration could impose tariffs on pharmaceuticals from Switzerland in an attempt to balance a negative total trade balance of $20bn in 2018. The US accounts for more than a third of Swiss pharmaceutical exports. Stocks of Swiss pharmaceutical companies dropped at the opening yesterday with both Roche and Novartis falling almost 2%; however, both trimmed losses during the course of the day.

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Given the lack of major economic news this week, financial markets will remain highly sensitive to those developments and would most likely continue trading sideways in the absence of significant resolution on the trade war and Brexit fronts.

TRY interventions won’t help

Questions may arise on what actually triggers the current Turkish lira recovery phase despite the latest announcement of US sanctions against the Turkish economy. Some might say that penalties are softer than initially thought, yet it seems that the recent efforts from the Turkish state to stabilize TRY is likely to have a limited effect. As Turkish forces incursion advance through northeast Syria to neutralize the Kurdish militia in the region, it seems that Turkish President Recep Tayyip Erdogan is not expected to back down in view of the current political situation, paving the way for new trade sanctions and putting pressure on the Turkish Central Bank to make further cuts

Deepening economic woes are weighing on the lira following the release of weak industrial production figures in August, with month-on-month and year-on-year output falling by -2.80% (prior: 4.30%) and -3.60% y/y respectively. Therefore, the latter questions the timing of the CBT next easing steps, as its latest assessment of the Turkish economy for a “moderate recovery” rather reduced the scope for further reductions. We would rather suggest that the CBT is likely to adopt a more dovish bias next week as current US sanctions on Turkish officials and an increase in tariffs imports from 25% to 50% should maintain TRY under continued pressure. In this context, the interventions of Turkish state-owned banks, which amounted to over $3.5 billion last week, should not be sufficient to limit the decline.

USD/TRY is currently trading at 5.9125, approaching 5.9380.

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