Just when financial markets were beginning to calm down in a post-Brexit environment, and developments in regards to Conservative leadership and forward guidance from the Bank of England were seen by market participants as positive advances, financial markets witnessed another shock as a military coup in Turkey commenced Friday night. Right before the North American close reports began to hit the wires that a coup was underway in Turkey, causing risk correlated assets to drop into the close as the Turkish Lira plummeted. However, almost as quickly as the military coup began, the underwhelming putsch came to an end, with the military defectors quickly overtaken by government forces, helped by public protests towards the unorganized campaign that aimed to overthrow the government and President Erdogan.
Although one may conclude that given the succinct failure of the military coup in Turkey, financial markets will be able to shrug off any negative implications for broader risk appetite heading into Monday morning, there are a number of interesting continuing developments market participants should be aware of, as there is a possibility geopolitics don’t settle down right away. As the initial siege by the military defectors was underway, the Turkish government was quick to pin the blame for the coup on those factions within the military and government that sided with Islamic cleric Fethullah Gulen who resides in the United States under self-imposed exile. Not only has Gulen denied any part in the planning or execution of the coup, but has also responded that he would obey any extradition ruling from the United States, going as far as stating his belief the coup was organized by Erdogan in a bid to increase his presidential power within the Turkish government. Erdogan has stated an official request for Gulen’s extradition will be submitted to the United States, though at this time there hasn’t been a formal request. Secretary John Kerry has responded to the unofficial demands to hand over Gulen, and said the United States will make judgments appropriately based on any legitimate evidence the government of Turkey has in regards to Gulen’s involvement.
So while tensions between Turkey and the West are beginning to heat up over the involvement of Gulen in the failed coup, the immediate near-term consequences are that Erdogan will use this attack as a means by which to entrench the government and military, furthering his bid to consolidate power away from parliament and towards the presidency. What could be considered a “counter-coup” is already underway, as Erdogan has vowed to “systematically purge” all state institutions of Gulen supporters, which has led to approximately 6,000 people being detained. Given the swiftness of the crackdown on government opponents, it is not unreasonable to expect this number to grow in the coming days, and raises the political uncertainty. While it is likely that Erdogan and his AKP party will emerge from the failed coup in a stronger stance, the uncertainty will be if Erdogan uses this political momentum to call snap elections in a bid to secure a greater number of seats for the AKP party, furthering his goal of transitioning towards a presidential system.
We would expect the initial shock of Friday’s coup on risk appetite to dissipate into the week ahead, as the implications of the events over the weekend are likely to be viewed as localized by market participants, unless tensions between the United States and Turkey heat up over an extradition request for Gulen. There is the potential to see a bid in USD prevail relative to emerging market currencies, especially given that Turkey’s central bank has pledged unlimited liquidity to local banks as a result of Friday’s events. The accommodative monetary policy stance along with wider credit spreads will likely continue to weigh on the TRY in the week ahead, and while the events over the weekend are localized in nature, the risk off appetite has the potential to bleed into broader markets and continue to underpin the USD.
To receive our market analysis direct to your inbox daily subscribe here!
“Cambridge Global Payments” is a trade name, which in this document refers specifically to one or more of these legal entities: Cambridge Mercantile Corp., Cambridge Mercantile Corp. (U.S.A.), Cambridge Mercantile Corp. (Nevada), Cambridge Mercantile (Australia) Pty. Ltd.
Cambridge Global Payments (“Cambridge”) provides this document as general market information subject to: Cambridge’s copyright, and all contract terms in place, if any, between you and the Cambridge entity you have contracted with. This document is based on sources Cambridge considers reliable, but without independent verification. Cambridge makes no guarantee of its accuracy or completeness. Cambridge is not responsible for any errors in or related to the document, or for damages arising out of any person’s reliance upon this information. All charts or graphs are from publicly available sources or proprietary data. The information in this document is subject to sudden change without notice.
Cambridge may sell to you and/or buy from you foreign exchange instruments (including spot and/or derivative transactions; both kinds are here called “FXI”s) covered by Cambridge on a principal basis.
This document is NOT: 1) Advice of any kind, or 2) Approved or reviewed by any regulatory authority, or 3) An offer to sell or a solicitation of an offer to buy any FXIs, or to participate in any trading strategy.
Before acting on this document, you must consider the appropriateness of the information, based on your objectives, needs and finances. For advice, you must contact someone independent of Cambridge.
Certain FXIs mentioned in this document may be ineligible for sale in some locations, and/or unsuitable for you. Contact your Cambridge representative for further information regarding product availability/suitability before you enter into any FXI contract.
FXIs are volatile and may cause losses. Past performance of a FXI product cannot be relied on to determine future performance.
This document is intended only for persons in Canada, the US, and Australia. This document is not intended for persons in the UK or elsewhere in the EEA. In Australia, this publication has been distributed by Cambridge Mercantile (Australia) Pty. Ltd. (ABN 85 126 642 448, AFSL 351278); for the general information of its customers (as defined in the Corporations Act 2001). This entity makes no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law.
Fees may be earned by Cambridge (and its agents) in respect of any business transacted with Cambridge.
The document is intended to be distributed in its entirety. Unless governing law permits otherwise, you must contact the applicable Cambridge if you wish to use Cambridge services to enter a transaction involving any instrument mentioned in this document.
© Copyright 2018, Cambridge Mercantile Corp., ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of Cambridge Mercantile Corp. See www.cambridgefx.com for contact details.