10y US Treasury As A Global Markets Driver

At the center of all financial markets, we have the market for US Treasury. US fixed income market play a crucial role in the global economy. Treasurys are denominated in US dollars, the main currency used by central banks and major financial institutions around the world. Because the US government owes so much and because investors expect the US government to honour its debts always, the Treasury market is considered the cornerstone of the global financial system.

If we stay focused on Turkish bonds markets, it is hard to regret that it moves in a similar way as US market does after seeing the chart below.

US and Turkey Yields

Well, ahead of FOMC meeting, the rumours are main dynamics and shaping the opinion of all global markets. What we saw previously in US bond market is that the Fed is frightened to death by a sharp rise in yields. It is rational to expect Turkish bond market to maintain the trust of marketplace for a few weeks more.

Goodbye BRICS, Welcome BIITS

The acronym for the association of five major emerging national economies, Brazil, Russia, India, China & South Africa, has been on of the most frequently used elements in the financial terminology for recent years. Now, the outlook for emerging economies is stabilizing due to approaching new-normal and evolving international monetary reform, as some authors of Bloomberg introduce us the BIITS (Brazil, India, Indonesia, Turkey & South Africa).

Changing global conditions are also altering the risk perception of the emerging markets, that remained remarkably strong through recent years. The end of zero interest rate policies of developed economies is getting closer day by day. The threat of diminished global liquidity had already sparked the biggest emerging-market currency sell-off in five years, with the Indian rupee and Turkish lira hitting record lows. As most economists advise emerging countries to adjust a lower growth rate and refocus their economies, investors also reassess the assets held in emerging markets.

The general opinion is that emerging markets are no longer blanket buys, especially the ones who may remain vulnerable following the monetary tightening in the developed economies. This time, we do not have an acronym for shining emerging markets but for fading ones and the five major emerging markets that may likely be risky in the near future are BIITS, according to Bloomberg.

Speaking about Turkey, current account deficit is the chronic disease of its economy and its tremendous foreign exchange requirement to finance this deficit is putting the economy at risk. The annual growth rate at the end of last year was 2.2%, as well as was good sign in the way of re-balancing. This humble growth also led the economy moving out of danger with decreasing CAD.  However, 1Q13 results were simply unsatisfying; a 4.4% growth rate y-o-y and CAD up to $44 billion (this means a 25% increase in CAD).

Current Account Deficit to GrowthIt is not so far where investors will start to more choosy among emerging markets than they have been in the past and Turkey should be well-prepared to restrain the capital outflows.