Market nerves roil Turkey and Central Europe

Significance

Markets have taken badly the Fed's more hawkish policy guidance for 2017, not expecting such a shift in monetary policy so soon. The shift in US monetary policy comes just as the ECB is preparing the ground for the gradual withdrawal of monetary stimulus. While Turkish assets are the most vulnerable partly because of the severe escalation in political risk, the Polish zloty is also at risk thanks mainly to its status as one of the most liquid EM currencies.

Impacts

• Investors see global financial markets at an inflection point as monetary policy gives way to fiscal policy as the main source of stimulus.
• This monetary-to-fiscal shift will fuel uncertainty about the direction of asset prices.
• Rising oil prices will allay concerns about deflation in the euro-area.
• As major Emerging Europe currencies suffer, the ruble is rising against the dollar amid oil price rises and Trump’s Russia-friendly remarks.