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Elections are scheduled for the next weekend of 24 June in Turkey, where, in an early ballot, the parliament and the president of the country are elected simultaneously for the first time. According to surveys, the state of the country’s economy is one of the most important issues for voters. In recent weeks, Turkey has presented a rather mixed picture.

Recent economic growth rate figures have been promising, with an increase by 7.4 per cent in Q1 of 2018 compared with the same period of the previous year. In addition, unemployment fell to 10.1 per cent between February and April, marking the lowest level in two years.

Weak lira and high inflation put the central bank under pressure

The weak lira, on the other hand, is difficult for the country. The Turkish currency has been falling against both the Euro and the US dollar for some time, losing around 20 per cent of its value against the Euro and nearly 25 per cent against the US dollar since the beginning of the year. The most marked drop occurred in May, after President Recep Tayyip Erdogan announced in a TV interview that he would assume greater control over the Turkish central bank if he won the elections. On 23 May the dollar rose by 5.4 per cent against the Turkish lira to a record high of 4.9290 lira, the euro increased to almost 5.77 lira on the same day*.

The sharp decline of the lira forced the Turkish monetary authorities to hold a emergency meeting, after which key interest rates were raised significantly from 13.5 to 16.5 per cent. However, this proved a short-lived remedy against the downward trend. Consequently, the central bank raised the key interest rate by a further 1.25 points to 17.75 per cent at its regular meeting on 7 June, preventing a further slide of the Lira for the time being. On Thursday afternoon, the US dollar stood at around 4.75 lira and the euro at around 5.5 lira.

The weak lira is a problem for Turkey insofar as it significantly increases the prices of imported goods and thus fuels inflation. According to the Turkish statistics office, the inflation rate rose by 12.15 per cent in May to its highest level since November. By comparison, inflation was significantly lower at 10.85 per cent in April. In addition, the country's national deficit has increased perceptibly, increasing by 78 per cent to the equivalent of EUR 3.7bn in the first five months of the year. This imbalance in currency and inflation also shows in Turkey's consumer trust. In May, for example, the corresponding barometer of the Turkish Statistical Institute TurkStat fell by 2.8 percentage points compared to April.

Disclaimer:

Forecasts are not a reliable indicator for future developments.

All data as of 21/06/2018

The central bank policies of the USA and Europe are diverging further. While the US Federal Reserve (Fed) continued to raise interest rates this week, the European Central Bank (ECB) is still waiting, leaving its key interest rate at 0.00 per cent, which will likely not change until at least mid-2019. However, the ECB has already taken a first step towards abandoning its ultra-loose policy and set a schedule for the end of the bond purchase programme.

According to the European central bank, the programme could expire at the end of 2018. In addition, the ECB wants to reduce the monthly volume of purchases starting October from EUR 30bn to 15bn while also keeping a close eye on inflation outlook in the course of these decisions. This gradual reduction of the ultra-loose monetary policy was initially well received by the European stock markets; however, the euro experienced a dip of more than two cents. On Friday afternoon it stood at around 1.16 USD.

Since the start of the programme in March 2015, the central bank has acquired securities with a total value of over EUR 2.4tn to boost inflation in the euro zone and restore the ECB's target of around two per cent. Inflation has recently approached this level again: In May, the annual inflation rate in the euro zone climbed to 1.9 percent. Higher energy prices were an important driver in particular.

Fed announces two potential further interest rate hikes in 2018

Meanwhile, the monetary policy’s normalisation is already in full swing in the US. As expected, the Fed raised its key rate band by a further 0.25 points to currently 1.75 to 2.00 per cent on Wednesday evening. While this step was expected in the market, the interest rate forecast was noted with particular attention. The Fed has announced two possible further interest rate hikes instead of the previously promised single one. The forecast for 2019 remains unchanged, however, with three rate hikes.

There is currently no reason for the Fed to be shy about tightening the rates, as the US economy is running smoothly. “The decision you see today is another sign that the US economy is in great shape," Fed Chairman Jerome Powell commented on Wednesday evening’s interest rate hike. Unemployment in the US is currently at its lowest level in 18 years. In addition, inflation continues to rise. In May, US annual inflation reached 2.8 percent, a six-year high.

However, this means that inflation is already well above the Fed target of around two percent. With the higher interest rates, the central bank must therefore also counteract the possible threat of overheating. A higher key interest rate raises the costs for banks when borrowing money from each other. As a result, the cost of loans for businesses and consumers will also increase. This will enable the central bank to counteract a too-rapid economic boom.

Disclaimer:

Forecasts are no reliable indicator for future developments.

Since 1 June, the grace period for the EU is over, and tariffs on steel and aluminium are in effect for the European community and the USA’s neighbouring countries of Mexico and Canada. As of now, a fee of 25 per cent will have to be paid for importing steel, and 10 per cent for importing aluminium, into the USA. The penalties were actually imposed as early as March, but the Union and the two US neighbours were initially exempted from this rule. This further exacerbates the global trade conflict.

Politically, emotions were running high after the US customs decision. The EU announced tough countermeasures, and Mexico and Canada have already published lists of retaliatory tariffs on US goods. All three political entities have also filed complaints against the US with the World Trade Organisation (WTO). However, the new trade restrictions are also controversial in the USA itself: Larry Kudlow, economic advisor to US President Donald Trump, admitted that the tariffs could even harm the country’s economy.

Meanwhile, the financial markets have reacted calmly so far, not least because the topic was already an issue in March and April and has therefore already had its effect on the market. In April, for example, aluminum futures went on a rollercoaster ride from their previous annual low of 1,993* USD per tonne to an annual high of 2,550 USD, an increase of more than 28 per cent. Within the same month, however, the price returned to around 2,250 USD. Currently, aluminium stands at around 2,330 dollars on the London Metal Exchange, the price having only risen by around 1.4 per cent since the beginning of June.

Futures on hot rolled steel have recovered somewhat on the New York commodity exchange since the beginning of the month; there have been no significant price fluctuations in recent months. Since the beginning of the year, however, steel prices have risen by more than 37 per cent. Aluminium, on the other hand, has been stagnating with an increase of around 3 percent since the beginning of 2018.

Steel stocks in Europe only under short-term pressure

The stock markets have so far been spared major turbulence. After US Secretary of Commerce Wilbur Ross announced the end of the grace period, European steel stocks came under short-term pressure, including the two major German steel companies ThyssenKrupp and Salzgitter. Just one day later, however, the situation calmed down again and share prices recovered, making the overall impact on the securities relatively small. US steel producers’ exchange rates hardly benefited from import taxes for foreign competitors.

Experts’ assessments of the economic impact of the tariffs also gave cause for relief. “In my opinion, the immediate impact of the current decisions is limited. We are talking about 0.04 per cent of the European Union’s GDP,” said Jens Weidmann, head of the German Bundesbank. However, tariffs for the automotive industry, if introduced by the US, could cause more turmoil in the markets.  The US government is currently examining a potential imposition of import duties on cars.

* All data as of June 7, 2018

Disclaimer:

Forecasts are no reliable indicator for future developments.

The turmoil in Italy surrounding the combined government formed by the anti-EU Five Star Movement (Cinque Stelle) and the right-wing populist Lega have led to strong boosts of yields on Italian government bonds last week. The yields reflect the amount of interest a state has to pay for fresh capital on the financial market and are therefore an important indicator of the confidence of the capital markets in the political and economic stability of the country.

The previous week started with significantly rising interest rates after the coalition in Italy was declared a failure. This was triggered by Italian President Sergio Mattarella’s rejection of Euro-sceptic Paolo Savona for the post of Minister of Economy and Finance, giving rise to concerns about new elections in Italy and the return of the euro crisis, and thus driving bond yields. On Tuesday, interest rates on ten-year Italian government bonds reached nearly 3.4 per cent, their highest level since March 2014.

Risk markups also increased noticeably in other so-called peripheral eurozone countries such as Portugal and Spain: the yield on ten-year Portuguese government climbed to its highest value since autumn 2017. The uncertainty spread through the Italian stock market as well. Italy’s leading FTSE MIB index dropped by almost 7 per cent on Monday and Tuesday of last week alone. The euro also dropped to just over 1.15 dollars on Tuesday last, its lowest level since mid-2017.

Newly sworn-in government calmed the waters towards the end of the week

In the latter half of the week, however, the situation calmed again after Cinque Stelle and Lega were able to agree on a coalition. Friday noon, the new government was sworn in, with Savona as Minister for European Affairs and university professor Giovanni Tria as Minister of Economy and Finances. As a result, bond yields returned from their previous highs. On Monday morning, yields of 10-year Italian bonds were around 2.5 per cent, and in Portugal and Spain, interest rates also dropped significantly.

The stock market also saw an upswing before the weekend. The Milan index was able to make up for its previous losses and entered the weekend with a weekly gain of 0.8 per cent. On Monday morning, the recovery continued with a price gain of around half a per cent. Meanwhile, the euro also managed to halt it’s downward slide, regaining about two cents by Friday. At the start of the new week, the European currency stands at over 1.17 dollars.

Despite the recent recovery in the markets, investors are likely to be concerned about the political situation in Italy for some time to come. In particular, all eyes are probably on the planned government programme, promised to deliver more spending and less taxes despite the country's massive national debt, and the Italian government's relationship with the EU.

Disclaimer:

Forecasts are no reliable indicator for future developments.

2017 turned out well for European companies. Supported by the flourishing global economy and continuing low interest rates in the euro zone, many companies were able to increase their profits significantly in the past year. The businesses’ success is now reaching shareholders in the form of higher dividends.

According to calculations by a leading German investment firm, European companies will distribute close to 323bn euro in profits this year, 7.7 per cent more than in the previous year. An investment in equities therefore continues to pay off, particularly in comparison to other forms of investment. As the study also shows, the dividend yield in Europe has outperformed the yield on 10-year German government bonds by two percentage points for several years now. The German bonds are considered a particularly safe form of investment.

According to the investment house, New Zealand (5.11 per cent), Russia (+ 4.83 per cent) and Portugal (+ 4.47 per cent) currently offer the highest dividend yields when compared globally. With 2.22 per cent yield, Austria comes in at 25th place and thus in the lower third of the ranked countries. Germany ranks three positions ahead of Austria, with 2.51 per cent.

DAX companies paying out record dividends

This year, DAX-listed companies are paying out more dividends than ever before. According to a study by the DSW (Deutsche Schutzvereinigung für Wertpapierbesitzer), the Frankfurt’s leading index’s 30 companies are distributing almost 36bn euro to their shareholders for the 2017 financial year, around 11.5 per cent more than in the previous year. The combined distribution of all ~600 companies examined in the study increases by 11.6 per cent year-on-year, reaching a record value of 52.6bn euro in total.

Apart from dividends, personnel issues are a major topic at this year's annual shareholder meetings. Deutsche Börse has to look for a new chairman of the board, while the Deutsche Bank’s supervisory board will have to face many critical questions about the already-completed, sudden change of management after Easter. Meanwhile, the Air France-KLM aviation group appointed Anne-Marie Couderc as interim Head of State Secretary in at its general meeting in mid-May.

Disclaimer:

Forecasts are no reliable indicator for future developments.