Many of us are watching markets and Brexit chaos wondering why risk premia is not fully priced. Not only does uncertainty over EU-UK relationship threaten 20% of the global economy but economic data continued to indicated that the global deceleration is lasting longer than expected.
In addition, many analysts expected deeper slowdown, due to weakness in manufacturing and trade from where we are today. We believe the divergence between weak economic performances yet resilient equity market is due to central banks pivot from normalisation. With German yields back in negative territory and US treasuries curves inverted the FI market is clearly suggested weaker outlook.
The Fed shifting dots is a clear signal that major central banks are moving from normalisation back towards reflation. With loose monetary policy conditions the cost of risk taking decreases. We have witness the powerful effect of central bank easing by driving the longest bull run and overlooking idiosyncratic risk events.
The direction of inflation suggest that changes the current dovish bias is unlikely. In the coming month China should introduced additional easing measure, European provide modest fiscal easing and geopolitical support from US-China trade agreement provide and encouraging backdrop for equity prices.
Elsewhere, TRY has been on roller coaster ride of stomach turning effect. Markets have reacted to government interventionist measure stopping financial institutions from working deal that would directly lead to liar deprecation.
This follows on the heels of suspend the one-week repo auctions. This singular move should be consider a 150bp hike on bank financing. Re remain constructive on USDTRY as the financial chaos will begin to spill over into political disorder.
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