Financial markets in Turkey and across the Middle East continue to be dominated by talk of shifting powers across the region. The newly "elected" president of Egypt met with U.S. Secretary of State John Kerry in Cairo on Sunday after the U.S. announced it would continue to support the Egyptian government by providing military and financial aid. Kerry continued on to Iraq on Monday where he met the Iraqi prime minister to discuss the advance of ISIS forces across Anbar province en route to Baghdad.
Investors are looking for any sign of abatement in ISIS's advance and are growing weary of what the eventual resolution to the ISIS conflict will be. It is almost a foregone conclusion that a U.S.-led coalition will come to the aid of the Iraqi government, which appears unable to contain ISIS by itself, however, the makeup of this coalition will be very important in affecting markets.
An ISIS with access to Iraq's oil wealth would be a nightmare for the entire region, obviously, thus Western intervention along with local support appears to be guaranteed at this point.
Potential members of such a coalition include the Iranians, the Saudis or even the Turkish military. The U.S. has ruled out any boots on the ground in Iraq and as such, this leaves only air support plus financial support to a proxy force to help save the already weakened Al-Maliki government.
If the Iranians send in troops to fight ISIS's forces, they would almost certainly be victorious with their million-plus forces against a force of only a few thousand ISIS members, especially if it was backed up with U.S. air power. A U.S.-Iran coalition fighting alongside the Iraqis in Iraq itself would have been laughed off as stranger than fiction a few weeks ago, however, this appears to be the current state of affairs according to sources on the ground in Iraq. The inclusion of a Sunni power in any anti-ISIS campaign, Turkey or Saudi Arabia, would give the "coalition" legitimacy as it would quiet those that may claim any military action in Sunni dominated lands is merely an extension of the seemingly anti-Sunni tilt of the Maliki government. Turkish markets regained some of the ground they lost last week in the wake of the blitzkrieg tactics used by ISIS fighters as the benchmark BIST-100 index was up over 1,000 points, trading at 78,861 midday Monday, up from 77,770 where it traded one week ago.
Fixed income markets were mixed, however, as the benchmark two-year bond's yield was up to 8.47 percent from 8.33 percent. The long-end 10-year bond traded higher as its yield dropped to 8.81 percent down from 9.09 percent, where it traded last week.
The Turkish lira also regained some of its losses from last week, trading at 2.13 liras to the dollar, down one cent since last Monday. Credit-default swaps, a good measure of economic and political stability, traded at 1.82 percent, down 3 percent from last week, when they had traded around 1.88 percent. Stability here points to a prediction by markets of a loss by Ekmeleddin Ihsanoğlu, the opposition parties' nominee for president in Turkey's upcoming presidential elections to face-off against Prime Minister Recep Tayyip Erdogan.
The Central Registry Agency's (MKK) "Foreign Participation in Turkish Equity Markets index" was reported to be at 64.22 percent Monday, which means the level was unchanged from where it traded at last week. This vote of confidence by foreign investors echoes my earlier sentiments that the ISIS conflict will soon be put to rest.
Investors should expect continued cuts in interest rates at the next meeting of the Monetary Policy Committee of the Central Bank of Turkey, which will be announced on Tuesday as inflation appears to be in decline. The bank will also announce Capacity Utilization numbers on Tuesday followed by Consumer Confidence numbers on Friday. I expect no negative surprises here, in fact, we may see a higher-than-expected number in Consumer Confidence on Friday.
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