Regular readers will know that, with a few honourable exceptions, I don’t have the highest regard for FX strategists. It comes from bitter personal experience and, if I am honest, the surge in retail (sorry – institutional!) FX brokers seeking to give their clients insight (when all they mostly do is report the news). That said, even I would have to draw the line at FX strategists as market manipulators.
According to reports at the weekend, however, this is a line that the Turkish authorities are more than willing to cross, stating as they did that they are investigating several banks, including JP Morgan, for “misleading” reports that hurt the reputation of the country’s banks and led to a weakening of the Turkish lira.
The headline of the JP Morgan report was apparently a recommendation that clients go long USD/TRY with a target of 5.90 (it was around the 5.50 level at the time) and, indeed, USD/TRY shot higher Friday, to 5.84. This represents both a tidy 6% return to anyone who got on it quick enough and a roster of happy clients at JP Morgan, although there is bound to be one or two that got long at 5.80 and at the time of writing, their trade is costing a cheeky 2.5%!
So far, so good, but what exacerbates the issue is that un-named people have apparently complained about the “misleading” aspects of the report (the Turkish authorities don’t highlight what they are of course) and now those authorities are “investigating”. What they are specifically investigating we don’t know, but they are “investigating”.
I have worked with some strategists over the years who I would gladly see investigated on the grounds of their track record (maybe as a proportion of their TV appearances?), but never would I say that anyone has deliberately been dishonest or made stuff up to back up an argument – it just doesn’t happen.
A strategist’s job is to deliver trade ideas and detailed information on particular subjects. Granted some strategy desks have trading capital (they are a lot fewer in number nowadays I suspect) but if they do, their recommendations are (or should be) vetted in depth to ensure they do not stray into uncertain territory.
Apart from ensuring that no JPM strategist is likely to go on a business trip to Turkey soon, the matter has some dark undertones that remind me – and bear with me on this – of the New York Department of Financial Services investigation of banks’ use of last look.
Turkey is effectively saying that JPM and other banks have gone rogue with their strategy reports and are “misleading” investors. I see the job of the strategist as taking hard data, overlaying an in-depth understanding of the subject matter, and the delivery of a recommendation. Aside from the procedures involved, which I am sure are stringent, this was also not exactly the hardest call in the world – and that is probably where the “several banks” being investigated report comes from. It’s not just JPM that thinks you should be short TRY, it’s most of the world!
Of course, we should also ask ‘what are these reports demonstrating?’ The general sentiment of market participants – that’s what. These reports are not a “wish list”, they reflect economic and geo-political reality, as well as the broader market sentiment – and in spite of what many politician and authoritarians would wish, sentiment drives asset prices.
So this seems a modern day case of “shoot the messenger”; back in the day this would have been expressed in terms of a public statement arguing that markets were not reflecting economic reality; today, it’s let’s launch an investigation – and this is where I think there are parallels with the DFS investigation into last look.
Several sources familiar with the matter have told me that the DFS “encouraged” banks to roll over and pay the fine or risk having their banking licence withdrawn. Turkey is obviously looking at this investigation as a potential means to threaten some sort of sanction, which could include withdrawal of banking licences.
In both cases this is bullying, something broader society is trying, quite rightly, to stamp out. JP Morgan’s response has been a firm “no comment” to all media enquiries, but it is to be hoped in the background they are lobbying hard and defending their staff should the need arise.
Analysts and strategists need to be free to express their considered opinions, in fact that is now written in the bedrock of financial markets’ regulation in many areas, but to do so they need to know they can do this with the protection of an employer that will back them, not cave in to the latest threat.
I happen to believe that the Turkish issue will fade away in a few days, coincidentally after the impending elections in that country. I certainly hope this is pure electioneering (and if it is it doesn’t say much for the independence of the regulatory function in Turkey) and that the market can get back to normal working in due course.
If it isn’t you just know there will be a copycat somewhere in the world, and what worries me is that we eventually end up with another FX show trial of the like we have had to suffer in the US with the traders, only this time it will be analysts. Somewhere, at some stage, the FX industry has to stand up for itself in a stronger fashion that it currently does – if it doesn’t it will become an emaciated shadow of its former self, and that is no good to anyone.