Wednesday, January 29, 2014

Emerging Market Noise: Turkey Raises Rates

Emerging Market Noise: Turkey Raises Rates

Last night the Turkish Central Bank raised interest rates dramatically.  For example, the one week REPO was increased from 4.5% to 10%.  Within minutes the Turkish Lira strengthened relative to major currencies.  As I went to bed, Asian stocks were rallying and various news services were reporting that the emerging market crisis might be abating.  While most of us were sleeping in the United States, European markets jumped and the headlines and market commentaries remained optimistic.  However, the Lira rally faded, and with it the gains in many stock markets.  By eight o’clock this morning, the headlines and commentaries had turned cautious again.

This is yet another example of trying to create a narrative out of noise.  Because the currency and equity markets reacted to the Central Bank’s move, we needed to have a story.  By the time strategists and commentators had put out their sound bites on Erdim Basci’s bold move to raise Turkish interest rates, traders were already taking profits.  Nothing else had changed.  Argentina, South Africa, Ukraine, and a bunch of other worries were still festering.  As the Turkish Lira comes under renewed pressure this morning, we are looking for new stories to help explain the noise.

We will hear about the handful of few traders who made a tidy profit in about three hours time during the night.  However, we won’t hear about the traders who were caught on the wrong side of the Lira blip.  At best, trading on noise is a zero sum game.   It is particularly dangerous for those who think there really is a story behind the market’s hour-to-hour gyrations.

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