Recession fears continue to rattle global markets

Uncertainties and risks continue to cast their shadow on global markets, and these recent fluctuations, in particular, are robbing us of our ability to make accurate predictions. As I talked about the sharp rises in commodity prices for a while, I’ll try to predict how far these prices could drop for a change. So what's going on in the background?

The U.S. Federal Reserve has been prioritizing tightening monetary policies for a while. In this context, it concluded the asset purchase program that first started during the pandemic period. After that, interest rates began to rise. It increased interest rates by a total of 150 basis points, first by 25, then by 50, and finally by 75 basis points. On top of that, the balance sheet began to shrink. By the end of the year, we expect at least 150 basis points of interest rate hikes, while reducing the balance sheet by $522.5 billion.

We see that the Fed, which initially described inflation as "temporary" but later said "we made a mistake", tightened extremely quickly this time. This situation is further compounding recession concerns.

First, after the pandemic period, and in the aftermath of the Russia-Ukraine War, oil prices started to rise to record levels. There were even experts who predicted hitting $280-300 per barrel as the war raged. However, at the point reached today, we have seen below $100 per barrel for Brent. There is a general consensus that the main factor in the said decline is the expectations of a recession. In addition to this, I think that the cheap oil that China and India buy from Russia should also be taken into consideration.

A similar decline to the one in oil prices is observed in other commodities as well. The Bloomberg Commodity Spot Index, a basket of 23 different commodities including energy, metals, and agricultural products, has started to decline markedly after peaking earlier last month.

One of the most important factors fueling recession expectations is the interest rate hikes made by one central bank after the other to combat inflation. Of course, the effectiveness of monetary policy is important for the fight against inflation. However, it is also true that reckless and abrupt movements may trigger a recession.

The Dollar Index, an indicator that measures the value of the U.S. Dollar against the 6 most traded currencies in the world, has continued to increase. The index has reached its highest level since 2002.

Meanwhile, the fact that the European Central Bank did not act hastily in ending asset purchases and raising interest rates puts pressure on the Euro. As such, the Euro/Dollar parity decreases. So why does this matter to us?

Raw materials imported by Turkey's manufacturer-exporters are priced mainly in Dollars, while the products they export are predominantly priced in Euros. In this respect, the decline in the Euro/Dollar parity negatively impacts the profitability of Turkish exporters.