The United States presidential nominees narrowed with the presumptive selection of Donald Trump as the Republican Party nominee. The U.S. Federal Reserve (Fed) will most likely raise interest rates at their June meeting. Prime Minister Ahmet Davutoğlu has signaled he will step down when a successor is chosen to replace him at his party's convention in the coming weeks. Turkish financial markets have taken news of Davutoğlu's departure in stride in anticipation of the new prime minister.
With the Republican ticket a foregone conclusion at this point, the Democrats have turned to Hillary Clinton to lock-up her party's nomination. While Clinton is still opposed by Bernie Sanders, she too is on track to clinch the nomination in the coming weeks should her poll numbers hold-up. Sanders would need to win the remaining states in landslides and/or convince super delegates to realign themselves with him if he hopes to upset Clinton this late in the nomination process.
Trump has signaled he would replace Fed Board Chair Janet Yellen if he is elected. While technically possible, such a move would be in direct opposition to the "independent" nature of the Fed. The position is a four-year position but appointment to other office or resignation would cut short the tenure of a Fed chair as has happened in the past. Trump also hinted at a default on U.S. debt obligations, saying that he could "make a deal" in the event that "the economy crashed." Trump argued that should current near-zero interest rates increase, then the government would be hard-pressed to roll-over debt obligations, saying in a CNBC interview: "What happens if that interest rate goes two, three, four points up? We don't have a country. I mean, if you look at the numbers, they're staggering."
While U.S. debt obligations would increase, Trump later walked-back his remarks implying that he wouldn't "make a deal" with the holders of debt but would buy back debt to drive the interest rates of other debt obligations down. But by the time his recantation of his own words was uttered, news of his remarks had already circumnavigated the globe and the damage was done. While no U.S. Congress in their right mind would allow a president to unilaterally "default" on debt, the mere suggestion of it being a possibility certainly may have spooked some investors.
The next meeting of the Federal Open Market Committee (FOMC) of the Fed will take place on June 14 and June 15, and I believe the FOMC will raise rates. I had argued nearly 18 months ago that there would be only one rate hike until June 2016 and I was partially right. I had predicted the lone hike would come in June 2016, while the Fed surprised many by raising rates in December. Long weary of appearing political, the Fed will do its best to stay out of the policy debates at the center of the U.S. presidential election. To that end, the Fed will raise rates in June then leave them untouched until the end of the year and revisit a hike at their December meeting, when a new president has been elected but not yet seated. At that point, should the U.S. and global economies continue to improve, the Fed will raise rates again.
An interest rate hike in June will bring the Federal Funds rate to 50 basis points, less than half what Fed governors had predicted rates would be by year's end. The slow-down in actual rate hikes relative to predicted hikes has not gone unnoticed by global investors with the dollar under pressure worldwide.
The Turkish lira fell over 4 percent on news of a shift in power in Ankara last week. Ahmet Davutoğlu, the prime minister and leader of the Justice and Development Party (AK Party) announced he would step down at a party convention to be held next week. While the lira actually improved in the days following the announcement, markets continued to take the news in stride, with the benchmark BIST 100 index actually trading up over 1 percent on Monday. Year-to-date, the index is still up double-digits and continues to be one of the best performing emerging market indexes.
As summer rolls in, investors will continue to watch Chinese financial markets for any signs of a repeat of last summer's market plunge. Oil will also be in play as lower demand will continue to push prices down. Finally, look out for Russia to play a positive role in helping to resolve the Syrian conflict should it get the concessions it demands from the U.S. and Europe.