The Turkish Lira was the worst performing currency early Monday after the U.S. and Turkey announced the suspension of visa services for citizens looking to visit each country. Traders responded aggressively to the news, sending the Lira more than 6% lower against the U.S. currency - its steepest decline since 15 July 2016, when Turkey witnessed the bloodiest coup attempt in its political history. However, the Lira managed to recover more than half of its losses, as investors viewed the recent tensions as controllable. With Turkey, increasing political ties with Russia and Iran, and Washington continuing to support Kurdish groups, the political risk premium is likely to keep pressuring the Lira. However, it would require far more escalation to see the currency trading near January lows of 3.94.
Precious metals continued to benefit from a Russian report on Friday, stating that North Korea is preparing to test a long-range missile, believed to have the capacity to reach the West Coast of America. Gold added $24 from Friday’s lows of $1,260. Gold has been in a downtrend since 9 September, as expectations of tighter monetary policies in the U.S. and elsewhere became the most dominant factor impacting the price of the precious metal. Investors now are trying to evaluate whether geopolitical risks or monetary policy will have the greater impact, and this all depends on whether the U.S. – North Korean tensions, will intensify or de-escalate from current levels.
Sterling will also be politically driven as negotiations between the UK and EU officials resume today. We have reached the fifth round of negotiations with no clear plans on how the UK will depart from the EU If talks end this week without any agreements, we will likely see the pound dropping below 1.30.
U.S. equity investors will shift their attention from fiscal policy plans to the earning season. The estimated growth rate for the S&P 500 is 2.8% according to FactSet, with seven sectors expected to report earnings growth for Q3. Given that earnings growth estimates have fallen by 2.2% from 5 September, there’s a lot of room to see positive surprises. This week, banks will be the major driver for Wall Street, with JP Morgan, Bank of America, Citi Group and Wells Fargo, due to report their results.
On the data front, U.S. September’s CPI on Friday will be the most watched economic figure after U.S. wages grew 2.9% from last year, their biggest gain since December 2016. Whether higher wages will translate into higher or lower inflation, will remain a mystery. The core inflation figure should be of greater importance, given that the surge in gas prices is likely to disrupt the headline reading. Traders will also closely scrutinize the FOMC minutes on Wednesday, but given that expectations of a rate hike in December stand at 80%, the impact on U.S. Treasury yields and the dollar is likely to be insignificant.