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Turkish Coup Attempt Sparks Rapid Investment Outflows

Failed Overthrow Effort Draws Erdogan Crackdown, Threatening Economic Outlook

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After an unsuccessful attempt to forcibly remove Turkish President Erdogan from power, the government has declared a state of emergency, using the powers to arrest tens of thousands of individuals. The move drew sharp criticism from international partners as S&P and other ratings agencies downgraded the investment outlook, causing the Turkish Lira to slump to record lows.

Last Week


Although there was an abundance of important economic data released throughout the week, Turkey dominated the news wires after Turkish President Erdogan declared a 3-month state of emergency, giving himself and regional governors more consolidated powers.  So far, the expanded powers have been used to seize institutions and arrest thousands of opponents tied to political dissident Fethullah Gulen.  Moves by credit rating agency S&P to downgrade the status of Turkey’s sovereign debt in response have drawn a strong rebuke from President Erdogan and caused an accelerated exodus from Turkish assets.  The Lira hit a new record low against the US dollar, with expectations that the trend will persist amid an uncertain outlook for the nation.  Back in Europe, the European Central Bank opted against adjusting monetary policy, leaving interest rates and the pace of asset purchases on hold while discussing the need for a better plan to deal with nonperforming loans burdening bank balance sheets. Nevertheless, concerns are growing about the ECB’s ability to restore inflation and the supply of eligible assets that qualify for the ongoing purchase program.  In response, the Euro fell to the lowest levels versus the US dollar since June, slipping back below 1.1000.  Aside from the losses in the Euro, crude oil prices ended the week significantly lower despite the US Energy Information Administration report of another drawdown in onshore oil inventories.  The combination of gasoline being stockpiled at a significantly accelerated pace combined with the drill rig count rising by 14 last week alone is raising anxiety about another potential inventory glut.  As onshore storage availability runs out, price competition amongst major producers may be revived, potentially leading to a deeper slide in oil, with prices falling to the lowest since May.

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The Week Ahead


Trading flows will be dominated by fundamental data due from across the globe during coming sessions.  The main events headlining the week are monetary policy decisions due from both the FOMC and Bank of Japan.  While neither Central Bank is expected to adjust policy this month, the statements and press conferences that follow will likely provide important hints about the outlook for policy.  Aside from monetary policy decisions, the other hot item on the calendar is preliminary second quarter gross domestic product readings due from advanced economies throughout the globe.  The US GDP reading is considered the most important, with second quarter expansion projected to be 2.60% versus 1.10% in the first quarter.  The UK GDP number is expected to show that the economy grew at a relatively stable rate, anticipating 0.50% compared to 0.40% during the prior quarter.  The Euro Area will report growth figures on Friday before Canadian GDP is released later in the session.  Outside of monetary policy and growth is early estimates of inflation that are due from the Euro Area, Japan, and Australia.  Although very little is expected in the way of progress on inflation with respect to Japan and the European Monetary Union, Australia is forecast to experience a further deceleration in the pace of consumer price gains, raising the specter of more action on monetary policy in the coming months.  Outside of major fundamental data is coming numbers for US durable goods orders alongside additional housing data in the form of new home and pending home sales.  While durable goods are forecast to remain challenging, the pace of contraction is expected to ease on a monthly basis with core durable goods orders expected to rise back into positive territory.

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