Oil is back. Crude oil hit two-year highs yesterday, trading up 71 percent from their lows in February 2016. This move comes on lower-than-expected inventories and just before OPEC meets next week to discuss the cartel's next move. OPEC has been pulling out all the stops to keep oil prices low enough to dissuade shale producers from increasing production. OPEC is also acutely aware of government budgets formulated using 2014 oil prices, which were over $100 a barrel. How are revenues maximized while keeping prices artificially low? It is undoubtedly, a delicate balance. Lackluster demand and projections for continued economic malaise have kept oil prices historically low for the past two years, but predictions that inflation is right around the corner have spooked oil buyers into covering shorts.
Inflation is projected to increase. Oil prices rise in anticipation of this increase. Inflation increases on news of oil prices rising. Is it a self-fulfilling prophecy or market manipulation? The current political climate globally is one of the fears. What is going to happen in North Korea? Syria? Yemen? Iraq? Iran? Qatar? Lebanon? Catalonia? Venezuela? Zimbabwe? All are hot spots with unpredictable futures. U.S. President Donald Trump's election has been anything but soothing to foreign markets. This has led to a "flight to quality" and to both dollar strength and a rally in U.S. markets. The losers in this environment have been nearly everyone else.
In terms of currencies in the last two months, the Canadian dollar is down 10 percent against the dollar and the Japanese yen is down 11 percent. The South African rand is also down 7 percent, and with a credit rating cut on the horizon, the fall in value of the currency may speed up. The Swiss franc, euro, the Brazilian real and Australian dollar are all down substantially against the dollar. The Turkish lira is no exception, down 16 percent in the last two months. With a higher beta and a near complete reliance on imported energy, Turkey's currency is very much susceptible to volatility in this interim period. After 10 years of near zero interest rates, is the world ready for "normalization" - to go back to periods of high interest rates and then back down? I do not think so. Those days are certainly behind us, it appears.
Growth is the key to any successful economy, and Turkey's growth prospects are looking up. With over 5 percent growth predicted for 2018, Turkey may be able to grow its way out of this impending global economic slowdown. The quicker Europe fully recovers from the post-Great Recession slump that it is currently in, the sooner Turkey's exports to the trading bloc will pick up. Turkey's neighboring trading partners - the Kurdistan Regional Government (KRG), Syria, and Iran are all embroiled in serious conflicts. These have hurt Turkey's export numbers. A quick resolution to these conflicts is necessary for trade to pick-up. With Russia convening a meeting in Sochi late Wednesday, both Iran and Turkey will negotiate what the new Syria will look like.
Having all but taken over Iraq in a U.S. power vacuum, Iran shares a long border with Syria just as Turkey does, while Russia uses it as its Mediterranean hub. Russia was never going to give up its military bases in Syria, apparently, and helped the Syrian regime wage a deadly war. Turkey relied on the United States and the international community to help it help the Syrian people, but the "red lines" that the United States drew were apparently drawn in dust and blew away at the first sign of conflict. Turkey's reliance on nonexistent European and American support has forced it to come to the negotiation table with Russia and Iran. With the alternative being a continued armed conflict in which hundreds of thousands of more civilians will die, Turkey had no choice.
Should the summit in Sochi end with a road map to de-escalation and rebuilding Syria, Turkey will benefit economically. The 3.5 million Syrian refugees would slowly return to Syria. Turkey will have to help rebuild the country and trade will slowly pickup. All of this is great news, most of all for the civilians of Syria, but secondarily for Turkey.
In this new, post-zero interest rate period, will emerging markets be able to hold on? The future for all developing markets looks bleak if the U.S. raises interest rates, but I do not think the U.S. Federal Reserve (Fed) will be able to raise rates without seriously hurting the U.S. economy. Therefore, look for rates to rise very slowly, if at all, giving emerging markets time to adjust and grow.