Can interest rates buy geopolitics?

There has been an unusual divergence in global markets over the last two days: oil prices are rising while bond yields are also climbing. Under normal conditions, this pair usually moves in opposite directions; if oil becomes cheaper, inflation expectations fall, and interest rates decline. But these days, the market is pricing in geopolitical risk in such a way that classic correlations are breaking down. The question that needs to be asked is no longer technical, but philosophical: Can interest rates really buy geopolitical risk, or are they just postponing it? The answer to this question will determine who wins and who loses in both developed and emerging markets in the coming weeks.

THE STRANGE ALLIANCE OF INTEREST RATES

Markets initially responded with strong optimism to the significant pullback in US bond yields the day before yesterday; risk appetite seemed to be recovering. But yesterday, the picture reversed: the rise in oil prices was accompanied by a new rise in bond yields, and global risk appetite weakened again. This is proof that investors no longer read oil merely as an energy price, but directly as a geopolitical tension index. If bond yields are rising, it means the market is saying, "this tension is persistent, central banks may delay easing." The course of oil prices and bond yields continues to remain the focal point for global risk appetite on the last trading day of the week. Eurozone and US leading PMI data will be the first real test to see how justified this reading is; if the growth signal comes in weak, the interest rate-oil alliance could strengthen even further.

THE REALITY OF THE GEOPOLITICAL PREMIUM

The critical point here is this: while the market is pricing in geopolitical risk, it is actually paying an insurance premium, not eliminating the risk. The interest rate differential is a call that says, "come and take this risk"; it does not destroy the risk, it only makes it portable and allows it to change hands. The US Treasury's increase in long-term bond buybacks also comes into play at exactly this point. It appears to be a technical debt management step, but its impact is much greater: by softening the yield curve, it has made the interest rate differential for emerging markets attractive again this week. As a result, emerging market currencies have largely gained value against the dollar since the beginning of the week. In other words, even as global risk appetite weakens, capital continues to buy risk in exchange for a certain maturity and yield. At this point, the real issue is whether the price of the premium is calculated correctly; history shows that markets often price in geopolitical risk late and incompletely. Before 2008, credit risk was similarly priced cheaply, and the real cost emerged with the crisis. Today's geopolitical premium may harbor a similar illusion: the low-appearing price does not mean low risk, it may just mean that the market has not yet fully priced it in.

THE APPEAL OF CARRY TRADE

When we turn to the domestic market, a very different picture emerges. Borsa İstanbul is performing significantly stronger compared to the selling pressure in foreign markets. The BIST-100 index holding above the 14,250 point level maintains its short-term upside potential. While the 14,650 level is the main target, technical levels in futures contracts also support this resistance.

However, on the other side of the coin are exchange rates and capital flows. The high local interest rates offered by Turkey have created a strong carry trade advantage. The fact that the USD/TRY exchange rate is testing levels above 48.05 and has risen by a limited 1.1% since the beginning of the month points to a controlled course. While the market participants' end-of-month exchange rate expectation is at the 48.19 level, the behavior of foreign investors is quite remarkable.

FLIGHT FROM GDS TO STOCKS

According to the latest data released by the CBRT, the Government Debt Securities (GDS) portfolio of non-residents decreased by 306 million dollars in one week, adjusted for market changes and exchange rate differences. In the same period, the foreign stock portfolio increased by 176 million dollars. This shows that foreign capital is shifting towards Borsa İstanbul, which remains relatively cheap and exhibits global divergence, while exiting fixed-income securities to some extent.

However, this capital transition also brings with it a fundamental contradiction. Although interest rates seem to have balanced geopolitics, the main motivation of hot money is not permanent investment, but arbitrage opportunity. While the carry trade offered in the oasis of high interest rates suppresses volatility in exchange rates, rising oil prices and geopolitical fractures in the global supply chain increase the cost burden on the real sector.

A FALSE SPRING?

The appreciation of emerging market currencies against the Dollar may create a false spring atmosphere in the markets. However, macro data such as the consumer confidence index, real sector confidence index, and capacity utilization rate announced by TurkStat and the CBRT are much more critical for keeping a pulse on the real economy.

In conclusion, high interest rate policy can temporarily direct capital flows and alleviate pressure on the exchange rate. However, it cannot completely cover up high energy costs, geopolitical risks, and the danger of global stagflation. Interest rates bring geopolitics to the table sooner or later; but the one who always pays the bill at that table is the real economy and sustainable growth.