Finance Friday 27.11.2015

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Di Nikola Kedhi.

An unexpected event hit European markets hard, causing major declines with the airline industry most affected. Turkish and Russian stocks were the ones suffering the most as geopolitical tension affects stock markets once again. Meanwhile, optimistic macroeconomic data for the third quarter makes an interest rate increase in the US almost inevitable.

On Tuesday, after a Russian jet was shot down by Turkey’s military, market reaction was immediate. The Stoxx Europe 600 declined around 2%, the most in two weeks. According to Bloomberg, the Russian RTS Index closed down 3.3%. Later that day Russian President Vladimir Putin called the downing of the jet a “stab in the back from the accomplices of terrorism”. Considering that Turkey and Russia have close trade relations, it should not come as a surprise that after this declaration, Turkish stocks saw more negative pressure than any other market, contracting by around 4.4%. Moreover, all major indices declined as a consequence of this geopolitical uneasiness: FTSE 100 went down 0.5%, Ireland’s ISEQ Index lost 1.2%, while France’s CAC 40 dropped around 2%.

Airline stocks were undoubtedly hit the most by the event. British Airways’ parent company, International Consolidated Airlines Group fell 3.3%, EasyJet PLC dropped 3.2%, while TUI AG — a German multinational travel and tourism Company — lost 3%.

President Putin explicitly warned Turkey, saying that the shoot-down will have “serious consequences”. This is clearly going to have implications for the two countries, which have had close economic ties for years now. Tourism is the most important sector that connects the two and the first one to be hit. 4.4 million Russians visited Turkey in 2014 only. However, Russian Foreign Minister Sergey Lavrov cancelled his visit to Istanbul and advised his citizens against going to Turkey for the near future. Tourist agencies are also suspending holiday package offers to Turkey. Furthermore, around 4% of Turkish exports go to Russia, mainly food and textiles. Meanwhile, the Russians supply oil and natural gas to Turkey. It should be said that a military conflict between the two nations seems very unlikely, precisely because of the high costs it would incur. At the same time, tension and anxiety will probably be felt across the markets.

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The day following the attacks investors turned their attention to the US, putting to the sidelines the recent geopolitical troubles. According to recent data, in the third quarter the US economy expanded at a faster pace than previously anticipated. GDP increased at a 2.1% annualized rate, up from the 1.5% estimate. However, consumption grew less than previously predicted, at an annualized rate of 3%. The dollar reached a seven-month high against the euro and is getting close to a parity with the European currency. Again, all this new data reinforces the belief that the Fed will increase the rates next month. Investors now believe that there is a 72% chance that there will be a rate hike.

Lastly, on Wednesday, European shares rebounded and rose 1.4% as the prospect of more stimulus from the ECB next week create a room for optimism. The central bank’s main priority — inflation — remains very low at around 0.1%. This will certainly play a big role in their decision to increase the monetary stimulus during their meeting on December 3d.

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