Bear trap in the markets
The wave of sales in global financial markets is over sooner than expected. The hawkish messages from the European Central Bank’s meeting in Sintra, Portugal, in June roiled bond markets, but there was no permanent effect on the global risk appetite.
Central banks struggled to cope with the 2009 financial crisis by reducing short-term interest rates to zero and initiating a bond-buying program. Now they want to normalize as the downside risks to global growth are declining.
The first step on that path was taken by the U.S. Federal Reserve, when it increased short-term interest rates and reduced its balance sheet, which will continue until the last quarter of 2017. The European Central Bank, which believes downside risks in the econ- omy have declined, will probably end its bond-buying program and start raising interest rates by the second half of 2018.
Central banks raising interest rates and reducing balance sheets will, of course, be influential on global equity prices. We have now come to the end of a 30-year bull market in developed markets. But this doesn’t necessarily mean that a bear market will immediately emerge.
Signals of normalization in monetary policies won’t necessarily cause another “taper tantrum” like the one former Fed governor Ben Bernanke stirred in May 2013. Downside surprises regarding inflation figures in the United States, Europe and Japan indicate that the possibility of a sharp tightening in monetary policies will be very low.
I believe that core inflation figures remaining under the historical average will limit the tightening in monetary policies despite the revival in the global economy and recovery in employment markets. If inflation remains relatively low, despite the eventual recovery in growth and employment, it won’t be enough to reverse the increase wave in equity markets.
The Fed’s slow pace of interest-rate hikes and balance-sheet reduction will continue to be positive for emerging markets, including Turkey. Borsa Istanbul, which is sensitive to the global risk appetite, hit a record of 100,000 last year, increasing by almost 1 percent.
The MSCI Turkey index became the second-highest revenue-generating emerging market in June at more than 4 percent in June, following China Group A stocks. Will this rise continue? The analysis based on brokerage institutions’ data indicates that the engine of this growth was foreign and resident investors are in a sale trend. If the money keeps flowing into emerging markets, we may see Borsa Istanbul hit 105,000 to 110,000.