Municipal elections were held across Turkey Sunday as 85 percent of eligible voters cast their votes. Overall the two main parties gained votes throughout the country, while smaller, more regional parties lost support. Financial markets largely shrugged off the election outcomes as both the benchmark equity indices and currency markets traded relatively flat following the election results. What's most surprising is that these markets were relatively unchanged, while news of potential issues with the delivery of F-35 aircraft was being questioned. The news was at first negative than positive, and all the while markets were far less volatile than they were only days earlier. What does this all mean?
Financial markets generally "buy the rumor, sell the news" meaning positions are taken before news breaks to profit off of that news. If the rumor got the impending news exactly right, markets don't move much after the news breaks. If the rumor was wrong, then markets will appreciate/depreciate as a function of how positive the news is for those markets. In Turkey's case, pollsters largely got the election outcomes right it appears. They also appear to believe that the U.S. and Turkey either already have come to some sort of compromise when it comes to delivery of the Russian made S-400 air-defense systems or are on the cusp of such an agreement.
The issue is that the U.S. doesn't want Turkey to purchase the Russian made air-defense systems, the S-400. Turkey contends it needs to defend itself against threats in a dangerous neighborhood and that the United States won't sell them the competitor to the S-400, the Patriot. The U.S. says that a NATO ally buying the S-400 would open up the alliance to risks. Turkey contends that having an S-400 system in the hands of NATO would actually benefit NATO, not the reverse. In response to the impasse the U.S. has threatened to halt the delivery of F-35 fighters to Turkey, a fighter that was developed in cooperation with Turkish firms. On the surface this appears to be a major issue between two allies. However, if there were an actual major issue here, an issue that financial markets believed to be insurmountable, then surely financial markets would have seen a major sell-off. In short, the rumors are that this issue has been or is on the verge of being resolved one way or another.
In the run-up to the elections in Turkey, emerging markets saw major shifts amid global turmoil. Brazil saw the largest outflows from Brazil-specific funds in the last 39 weeks and South Africa witnessed the first declines two weeks in a row since the fall of 2018, according to EPFR - Informa Financial Intelligence. Should emerging markets enter a risk-off period, despite the European Central Bank (ECB) and U.S. Federal Reserve signaling dovish monetary steps in the future, these markets will experience major sell-offs. While the U.S.-China trade wars have yet to be resolved and no meaningful solution to the Brexit debacle is in sight, investors are desperate to anchor their money in safe harbors. Convincing these investors that emerging markets (EMs) are such a harbor will be an uphill battle to say the least.
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