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Santa To Take Back The Reins

The US markets kicked off the week on a negative note. All three major US indices slumped yesterday, and both the S&P500 and Nasdaq fell close to their 100-DMA and the lower end of their medium-term ascending channel base.

The major responsibility for the bad mood was not necessarily the omicron’s worries but rather seeing Biden’s $2 trillion Build Back Better project rejected by Manchin. That’s a $2 trillion that won’t hit the market so soon and help companies boost business at a time when the Federal Reserve (Fed) will be throwing less money onto the financial markets.

And the kneejerk reaction was strong. Goldman, for example, cut its US Q1 GDP forecast to 2% from 3% after the announcement. That’s a tough sentence; $2 trillion is a big amount taken off the table and could bring investors to reposition for worse, but not today!

US index futures recorded a strong rebound in the Asian session, with Nasdaq futures up by as much as 1%. With the rising volatility, we could see Santa taking back the reins from Manchin for the next couple of sessions. Low trading volumes could help exacerbate any rebound.^

Improved risk appetite will certainly not help gold clearing the $1800 per ounce resistance.

US crude rebounded after falling to $66 per barrel at yesterday’s selloff. The $70 resistance could be hard to clear as the omicron worries, and predictions of an increased global glut next year will continue weighing on the sentiment. As such, price advances are now seen as interesting top selling opportunities for those willing to strengthen their short positions for the coming months.

P.S. The growing headache in the Chinese property market will certainly not dent the mood meaningfully, as there is a strong belief that China will deploy all measures to contain the crisis from getting too big, and too far. And they have the means to do so.

The lira

Turkey went from tears to laughter within a single trading session yesterday, as first, the lira tanked to a fresh all-time low as President Erdogan said he won’t cut the rates because it is against Islam. Then, by night, Turkey announced new economic measures to deal with the actual crisis, and the measures sent the dollar-try from above 18 to 11 this morning. That’s a wild ride.

Now, the measures announce by Turkey are bold and unprecedented. They are very much unusual compared with usual market practices and the positive impact may not last long if there is not a rate readjustment that comes along. But the positive market reaction is a good start.

What’s responsible for most of the rally is the relief on capital controls, a fear that was adding an enormous pressure on the lira. ‘Turkey has no intention or the need to take the slightest step back from the free-market economy and the FX regime’. It’s a fundamental plus, that should help giving some support to the lira in the coming weeks. Second, the lower withholding taxes for the lira notes issued by the government should have a certain material impact.

However, one of the most mediatized measures which include the government’s guarantee to compensate for the loss of interest due to the lira depreciation should be taken with a pinch of salt, as the latter will hardly convince investors to take the risk of sitting on the shaky lira, and will inevitably weigh on the budget.

Moving forward: Inflation is key. Turkey will reveal an unavoidably jump in inflation to 25-30% levels in the next months, meanwhile the central bank will do everything to keep interest rates low. Market’s tolerance for the low-rate policy won’t be infinite, and the wind could rapidly change direction.

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