With the FOMC’s final statement release tomorrow afternoon, markets have seemingly taken a break the past 2 days to wait and see what the central bank says and does tomorrow. Futures volume overnight was the lowest since Thanksgiving, as was yesterday’s stock volumes.
Though many (including us) have written about the diminishing effect of QE on U.S. markets, its impact continues to be felt far and wide, in markets across the world. I am Turkish, and quite familiar with Turkish markets, vividly remembering the hyperinflation of the 1990’s and the subsequent banking crisis in the early part of this century. As a result, Turkish interest rates have generally been double digits, as inflation was always a lurking concern.
However, due to both domestic reforms and the international race to 0 in interest rates and central bank balance sheet purchases, Turkish rates have followed others lower. Here is a chart of Turkish 10 year swap rates over the last 10 years:
The 10 year swap rate has gone from around 18% in 2008 to around 7% today. Imagine the implications throughout the economy of such a drastic move. Not surprisingly, money is chasing stocks, as the stock market keeps making new all-time highs (it’s the best performing stock market globally this year). Here is the 20 year monthly chart:
A similar story is playing out in a market closer to home, Mexico, which has many structural similarities to Turkey, but also is benefitting from rates near all-time lows.
I am long-term bullish on the second-tier emerging markets that have large domestic consumer markets, favorable demographics, and low debt loads, which describes both Turkey and Mexico (and a few countries in Southeast Asia). However, their current stock market booms are being especially fueled by the policies of central banks thousands of miles away.
- Asia was mixed, with most markets close to flat in quiet trading.
- Europe opened flat, but rallied after strong German confidence numbers, now trading +0.6%. Industrials the leading sector, like the U.S. action yesterday. SPX futures +0.4%.
- The dollar and Treasury bonds are weaker, and oil higher (though other commodities mixed)