The art of playing for time
It was an eventful week for market participants and journalists. Three events took the lead: the EU summit on Brexit, the killing of Saudi journalist Khashoggi in the Saudi Arabian consulate in Istanbul, and Turkey’s coming back with a sovereign issue of Eurobond. Let’s sum up.
Another fruitless EU Brexit summit in Brussels has passed. During earlier European crisis such as the Greek, Spanish, and Portuguese debt crises, market players (including your correspondent) would wait long hours for the end of Eurogroup emergency meetings, and for announcements from the European Central Bank. This time, we’re all trying to focus ourselves for even a glimpse of an agreement that may break the deadlock between the EU and the United Kingdom on Brexit, which will occur in the coming March. British Prime Minister Theresa May proposed to extend the transition period in the hope that a trade agreement can be negotiated before the end of this period, which will expire in 2022. The main obstacle is the border between the Republic of Ireland and Northern Ireland. Analysts argue that very little would change during this extension of the transition period: the UK would continue to contribute to the EU budget, would not control immigration from the EU, and would not be able to enter into trade agreements with third countries. The one change would be that the UK would become a rule taker, abrogating the right to participate in the drafting of EU laws and regulations. While the EU might be agreeable to this solution, there is nothing to guarantee it would pass in Westminster. Furthermore, the cracks in May’s cabinet and within the Conservative party may result in unforeseen events during that period.
The killing of the prominent Saudi critic Jamal Khashoggi in the Saudi Arabian consulate in Istanbul was the most significant event in recent days. The Turkish government has told US officials that it has audio and video recordings that prove Washington Post columnist Khashoggi was killed inside the Saudi Consulate in Istanbul this month, according to US and Turkish officials, news outlets reported. The Saudi government said Friday that Mr Khashoggi died following an altercation inside the Saudi Arabian consulate on October 2. The event will result in a huge pressure on Saudi government, which is the most significant arms purchaser from Western countries, including US and the UK. The case could complicate Saudi government relations with the West, both geopolitically and economically. Furthermore, Saudi Arabia is the world’s biggest oil exporting country and an effective member the oil cartel OPEC. “With Saudi now appearing as a somewhat uncertain and unpredictable ally in the US’s greater battle with Iran, Turkey is underlining its strategic importance, even imperative, to the US,” said Tim Ash, strategist in Bluebay Asset Management.
After the release of US Pastor Brunson, the partial mending of diplomatic ties resulted in relief in markets and changed attitudes towards Turkish assets. The Turkish treasury issued a $2 billion 7.25 percent Eurobond, the first Eurobond since April. The latest macroeconomic data pointed to an economic “re-balancing” of the economy, whilst the lira gained 10 percent in two weeks. “But attention will quickly turn to next week’s MPC meeting. With the lira holding steady I don’t expect the MPC to further hike if it can get away with it, albeit this will leave them exposed again if the October print heads higher again,” Ash added.