Difficult times in Turkey

The big news from the weekend (barely) is of course the attempted coup in Turkey, which was swiftly suppressed and has resulted in a rapid crackdown against the coup plotters and more.  There are quite literally books that could be written about the Turkish political climate generally and this incident specifically, so it is impossible to explore the situation in complete depth in a few short paragraphs.

From a markets perspective (which is the viewpoint of your author and this blog), the failure of the coup is probably the best thing for markets in the short run, though it is less clear that this is the case over longer time frames.   Obviously it is a relief that the situation has not degenerated into civil war, which would be destabilizing not only for the country, but also the region and, by extension, the world.  That some key markets have opened with a partial retracement of their late-session swoon would suggest that this is a commonly-held view.


Of course, the political backdrop in Turkey has been troubling for some time.  While Erdogan was originally seen as a friend of democracy, the West, and markets, his slow slide into autocracy and the weakening of democratic institutions has been worrisome.  The reaction to the coup attempt, including mass arrests, calls for Gulen's extradition, and discussions of retroactively re-introducing capital punishment for the plotters, does little to dissuade the suggestion that this is a Reichstag fire-like moment for Turkey.

While the conservative rural regions no doubt appreciate the direction in which Erdogan has been taking the country (an Islamic Evolution?), the further that the country tilts from secularism and towards rule by a single strongman, the less stable it is likely to be in the future.   Given where it sits geographically and geopolitically, it has all the makings of a potential disaster; one need only look at the autocratic ruler across the border in Syria to see how bad things can get.

While it's true that the Turkish economy has outpaced many of the nation's EM counterparts over Erdogan's term of office(s), it's hard to escape the notion that things have gone off the rails recently.   Obviously, the wretched performance of the currency is one tell-tale sign, but so too is the collapse in tourism, down 34% y/y at last count.

Of course, much of that has to do with terrorist activities.   While those may not be directly linked to Turkish policy choices, as an outsider it is difficult to understand why the country exerts so much effort on fighting Kurds, who could be at the vanguard of the war against ISIS.  (Better left unsaid are the allegations that elements within the regime have assisted the Islamic state movement to various degrees.)

Perhaps markets will choose to view the extraordinary scenes from the weekend as just another footnote in Turkey's sordid history of political instability.  But it's difficult to escape the notion that the country is increasingly steering towards a fork in the political road, with each potential outcome more unpalatable than the last.  In that vein, it's hard to be anything but long-term bearish unless either the regime or the electorate decide to chart a different course.
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Unknown
admin
July 18, 2016 at 8:28 AM ×

The tourist arrivals chart is not seasonally adjusted, and so your -34% figure is wrong (compares may 16 to June 15). Excellent post otherwise

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Unknown
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July 18, 2016 at 8:29 AM ×

The tourist arrivals chart is not seasonally adjusted, and so your -34% figure is wrong (compares may 16 to June 15). Excellent post otherwise

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Unknown
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July 18, 2016 at 9:06 AM ×

Actually, I checked it on BB and your number is correct. TUTOARFY index, which shows yoy change is indeed -34.7% for May, next release on 28 July for June.

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Unknown
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July 18, 2016 at 9:06 AM ×

Actually, I checked it on BB and your number is correct. TUTOARFY index, which shows yoy change is indeed -34.7% for May, next release on 28 July for June.

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Nico G
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July 18, 2016 at 12:29 PM ×

google search for 'coo' reached a peak on Friday night

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Unclear Wessels
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July 18, 2016 at 12:41 PM ×

The drop-off in tourism can in large part be attributed to the tiff with Russia and the effective prohibition of holiday in Turkey by Mr P. Have a look at http://www.bloomberg.com/news/articles/2015-11-26/turkey-without-russian-tourists-strikes-economy-where-it-s-weak -- the numbers are something like 3.3M per 9 months as per the Turkish Tourism Ministry, so that explains the gaps in your graph reasonably well. Ironically, the tiff has just come to a close, with the Turkey holiday ban lifted, so I'd expect these gaps to be filled back again as Russians won't be put off by all this mess (although I suppose the Germans might be).

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Macro Man
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July 18, 2016 at 1:04 PM ×

The disappearance of Russian tourists explains part, but only part, of the decline in tourism y/y. Even if we extrapolate the Russians to 5m/yr, that only explains about a third of the decline.

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Anonymous
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July 18, 2016 at 2:48 PM ×

This is the 3rd day that the front month $VIX futures have traded in 13s. First time since last August, before meltdown. I don't mean to suggest anything like last August will happen again. Just citing front month VIX in rare territory. Even during August mess, it took 5 days for VIX to explode. It didn't go from 13 to 26 overnight. M1-M2 went backwards before that Monday

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abee crombie
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July 18, 2016 at 2:57 PM ×

https://www.frbatlanta.org/chcs/wage-growth-tracker.aspx?panel=1

more head in the sand time for Fed officials? First its the unofficial unemployment rate they look at, then wages, now whats going to be the reason they dont raise. I'm guess "world economy" or something of that ... yet there are no more bond vigilantes. At least that is until the bund fills the gap and starts selling off.

JPM out saying rotate into cyclicals for a 1-2 month trade...

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henner
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July 18, 2016 at 3:09 PM ×

Germans are a big part of the decline in Turkish tourism as well... my colleague just tried to cancel his holiday in Antalya starting on Friday. he's now going nonetheless, free of charge cancellations are only possible for Instanbul and Ankara

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Polemic
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July 18, 2016 at 3:18 PM ×

I'm a big part of the decline in Turkish tourism as well.
But tourism is only a symptom of the real problem. Fear for safety, both physical and financial.

But the real issue to watch is the change in US+EU relations with Turkey.
Note that EU is saying that if Turkey introduces the death penalty they can't join EU .. YAaaaaawn. The migrant weapon should be the one they are most concerned with. Note that the EU are even using this threat when on the other hand they are saying that Turkish membership is a billion years away for Brexit purposes. Both EU and US are going on about 'supporting democracy', but there are some really complicated politics going on here.

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Anonymous
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July 18, 2016 at 3:20 PM ×

It will only take close to 7000 years to double your money in a Japanese savings account

https://twitter.com/DriehausCapital/status/752117783849213952

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Anonymous
admin
July 18, 2016 at 4:38 PM ×

Erdo─čan fired:
9,000 police officers,
6,000 military (103 generals & admirals)
3,000 judges, prosecutors
Total ~20K

Turkey is just one giant powder keg.

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Anonymous
admin
July 18, 2016 at 5:03 PM ×

Eurostoxx vix lowest it has been in weeks across the first 3months. No volume in dax or stoxx after Nice or coup.

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Anonymous
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July 18, 2016 at 5:44 PM ×

Perhaps his draconian crackdown will provoke a genuine coup.

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johno
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July 18, 2016 at 5:50 PM ×

Interesting to see Nico "100% long GBP" on Friday. Curious why. I got short again after the squeeze and added after the Haldane comments. I think Weale's remarks today can be discounted, as usual. I don't put faith in any model predictions of GBP fair value ... all I know is the market expects a substantial easing package on August 4th, a "sledgehammer" no less. So, anyone looking to buy GBP will probably wait until after that, leaving bearish flows to dominate in the next couple weeks. Today's SoftBank/ARM deal is an interesting counter-factual though, I suppose ...

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Whammer
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July 18, 2016 at 8:28 PM ×

@Anon regarding Japanese savings.

http://s2.quickmeme.com/img/aa/aa702842c77416a1e630d386827c1dbe6fc41526aa60717bff5260d7133fcc65.jpg

- Whammer

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Leftback
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July 18, 2016 at 8:48 PM ×

@johno. We have no position in GBPUSD, still fearing the last dregs of a squeeze, but fundamentally we are also inclined to be very bearish cable here and also CADUSD, EURUSD and EUFN, but there will be some optimism on the latter going into Thursday's ECB meeting. Many of the optimists are expecting moves that aren't legal under EU law.

We are buying some longer-dated vol here, b/c it is very very cheap, as everyone assumes the Fed is out of the picture here and the ECB and BoJ have said "We Got Next". Still long UUP and we have now added some JPY. Crude is sliding again, and the metals are showing signs of weakness. USDJPY bumping up against firm resistance here at the 50 day.

It is interesting to watch USDCNY. A bit odd that PBoC fixing above 6.70, considering the Chinese just told us they are growing at a rip-roaring 6.5%, and of course we always believe their data. 6.70 would have triggered Armageddon last summer.

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Anonymous
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July 19, 2016 at 1:36 AM ×

Citigroup Has More Derivatives than 4,701 U.S. Banks Combined; After Blowing Itself Up With Derivatives in 2008

http://wallstreetonparade.com/2016/07/citigroup-has-more-derivatives-than-4701-u-s-banks-combined-after-blowing-itself-up-with-derivatives-in-2008/

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Thucydides, an Athenian
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July 19, 2016 at 3:25 AM ×

More fateful than Great Britain’s exit from the European Union, may be the stall, delay and hindrance of Turkey’s accession to the EU. There were once two (2) stalwart NATO Allies on the European Southern flank; the Eurocrats have gutted both of them. Tragic generation to have sacrificed its youth on Juno, Sword, Normandy and Omaha Beach, ridding Europe of one tyrant to be replaced by Bruxellian autocrats. No loss that the present EU unravels, but no need to rewind the clock back to pre-1815 Congress of Vienna.

https://www.theguardian.com/commentisfree/2010/oct/28/turkey-eu-accession-bid-why-bother (Martin Kettle, The Guardian)

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