GLOBAL CREDIT BULLETS | Monday, 22nd November 2021

Fed – waiting for new chairman
This week, the White House will likely announce the new chairman of the Federal Reserves. As the Powell mandate terminates in February, a nomination by December is necessary to give enough time to the Senate to approve. The re-appointment is a close race between current chairman Powell and Lael Brainard, currently on the Board of Governors. A confirmation of the incumbent would be a natural choice given the upcoming monetary tightening, but Brainard is more palatable to the left wing of the Democratic party, given her reformist stance, and her focus on climate and regulation. Markets would perceive a Brainard nomination as more dovish. The tapering has started and high inflation means hikes in 2022 are likely, but a good amount of tightening is now priced. A chairman changeover may mean more patience and more gradual hikes, leading to a bull steepening of curves and US dollar weakness. Longer-term, the difference would be minimal and the terminal Fed rate will be largely determined by inflation persistence.

Turkey – brace for (more) volatility
Last Thursday, the Central Bank of Turkey has cut interest rates by 100bp. This is the third cut in a row, bringing the total amount of cuts to 300bp over the last three months. The policy rate is now 15%, against inflation running at 20%. The deeply negative interest rates and the dovish tone of the central bank and the government have triggered panic selling in lira. The currency is now 10% weaker over the past week, and 35% year to date. As opposed to past episodes of volatility, international investors are not heavily positioned in Turkey. Still, domestic players, such as retails and corporates, have started selling liras more aggressively this week. Renewed cuts in the face of global tightening is likely to trigger an acceleration of domestic selling, further amplifying the downward spiral in lira. As reserves buffers remain low, the only way to stop currency depreciation is a turnaround of monetary policy, from dovish to hawkish. Eventually, the CBT is likely to end up hiking, but we think this may not happen soon. Until then, the Turkish lira and the economy will remain under pressure.

Europe – lockdown fears
European markets are getting spooked by fears of more lockdowns. Cases are on a dramatic rise in Central and Eastern Europe, and governments are reacting with more restrictions. Austria was the first country to announce a 3 weeks national lockdown on Friday. Germany has so far limited restrictions to unvaccinated citizens but the health minister is not ruling out following Austria’s path. Czech Republic, Slovakia, Greece have all introduced restrictions over the past few weeks. We see more partial lockdowns as a possibility in Northern Europe heading into the winter, but we think it’s unlikely it will turn into a more generalized closure (2020 winter style). For now, countries introducing restrictions are the ones with relatively low vaccination rates (60-65%), suggesting France, Italy, Spain, with vaccination rates above 80%, may remain immune. Moreover, hospitalizations remain low in most countries, suggesting a very cautious nature of the new restrictions. European markets started correcting on Friday, especially value, banks and re-opening sectors. We continue to see 2022 as a good environment for value trades, given high inflation and the recent signs of strong domestic demand. We thus would look at any big dip on lockdown fears as an opportunity to add back to the re-opening sectors.