Name of the game: Volatility
After what can only be described as a volatile start to the new year, the familiar themes evident during the back-end of last year look set to linger well into the early part of 2019. This is a dramatic divergence from a year ago when it could be said with confidence that volatility was perhaps the world’s most attractively priced asset. The S&P 500’s realized volatility was 17 percent for 2018, up from 6.8 percent for the previous year, which was the lowest level since about 1965.
At the global level, attention remains trained in the broader growth backdrop and potential implications that it may contain for central bank policy prospects. From a broad perspective, the entire market continues to be plagued by the ramifications of the U.S.-inspired trade war and the macro implications arising from them. As a trade team heads from Washington D.C. to Beijing in another iteration to resolve underlying issues, risk assets remain ever hopeful for some positive developments to stem the recent series of key corporate earnings downgrades. Either way, the latest federal funding row in Washington D.C., made worse by a split Congress, should underline the degree to which potential policy paralysis can undermine broader macro and risk sentiment going forward. If there is one great lesson of the past decade, it is this: Uncertainty creates opportunities for anyone with the time and resources to confront change.
Regarding Turkey’s case, the themes stay the same: highly volatile currency, inflation and slowing economic activity. On top of that, the upcoming local elections in March will add new reasons to consider volatility. Last week, the Central Bank of Turkey (CBRT) announced that it would hold an extraordinary board on 18th January to discuss an advance payment of its 2018 profits. The move seems to be aimed at providing the government with additional resources to loosen fiscal policy and prop up the struggling economy ahead of March’s local elections. Also, the fall in inflation in December will increase pressure on the Central Bank to decrease interest rates. As market watchers agree that an aggressive reduction in rates would undermine the CBRT’s efforts to patch up its damaged inflation-fighting credibility, prompting a fresh sell-off in the lira so tighten your belts, embrace the volatility ahead, consider your options, as always.