Nvidia results have been a new catalyst for world stock markets. The tech-heavy US and Japan continue on their way to new highs. Confidence is growing that demand for AI will grow at a geometric pace and boost productivity.
With strong profit figures, resilient growth and hawkish Fed messages, the expectation of a rate cut in May was shelved. Convinced that the Fed would not be fought, markets started pricing in a 75 basis point rate cut from June until the end of the year. Two months ago, expectations were approaching 150 basis points.
Flash PMI figures suggest that the US economy continues to grow at a pace of around 2 percent and inflation pressure is easing. The strong increase in the profitability of technology companies points to an upward market dynamic independent of macro parameters such as growth, inflation and the Fed cycle.
After the MPC meeting where the Turkish Central Bank signaled a strong lira, the volatility in Turkish markets temporarily increased. The Turkish lira gave back a significant portion of its gains after a short wave of buying. There is no change in the big picture. The Central Bank will continue to manage the exchange rate according to the inflation forecast.
The question we don’t know the answer to is what will he do when he sees that the inflation forecast is off? Will it readjust the exchange rate increase according to actual inflation? Or will it anchor inflation with additional interest rate hikes and higher interest rates for a longer period? The answer to these questions will also depend on fiscal and income policy in the coming period.
The two-year bond continues its upward trend that started in mid-February. We had anticipated that the Treasury’s borrowing needs would increase and interest rates would come under upward pressure due to the accrual and cash-based rise. Now the possibility of further interest rate hikes by the Central Bank has entered the equation. The market overestimated a little too much. If the Central Bank goes for additional tightening and the exchange rate increases according to the targeted inflation rate, there will be double-digit yields on government domestic borrowing bonds in dollar terms.
Borsa Istanbul continues on its way with small steps and new peaks. After the MPC announcement, we expected a shift from industrial stocks to banks. The market’s first reaction was in the opposite direction. The market focused on the measures to be taken against consumer loans and credit cards rather than the real appreciation of the Turkish lira.
We believe that the strong Turkish lira-strong bank relationship will be more decisive in the medium term. Banks benefit more than industrial stocks from increased predictability in the Turkish economy and lower risk premium.
We maintain our positive outlook for the Turkish economy and markets regardless of small shocks from global markets or domestic issues. The Central Bank’s signals are in line with our positive outlook for short and medium term Turkish lira denominated government bonds and corporate bonds.
Borsa Istanbul has largely met our estimated return for 2024 with a 17 percent dollar-based gain since the beginning of the year. But we do not see a turn in economic dynamics and profit expectations that would require selling. We continue to look at the glass half full.
