VKF_FRAE_2018_uyg11

VakıfBank Annual Report 2018 29 Uncertainty surrounding the UK’s Brexit process continued throughout 2018. Prime Minister Theresa May agreed on a draft Brexit agreement with EU countries, but then later had to postpone the UK Parliament vote on the draft until January due to internal opposition from her own party. Waging trade wars with the US, declining Chinese imports and exports, and decelerating global growth have had a negative impact on China’s economy. After expanding 6.9% in 2017, the Chinese economy grew just 6.4% in the last quarter of 2018, its weakest growth performance since the financial crisis. For 2018 as a whole, China recorded its slowest growth rate since 1990: 6.6%. In the aftermath of the massive capital flight of 2015, concerns remain that the Chinese economy may enter a new crisis. However, China is not expected to experience a similar problem as in 2015. The country adopted expansionary monetary policies to counter the economic slowdown following the trade dispute with the US. China has relatively low FX-denominated debt despite high overall foreign debt. Furthermore, it has capital controls in place and boasts very high US Dollar reserves. The trajectory of the trade disputes between the US and China will be an important factor for the global and Chinese economies going forward. In 2018, the Fed hiked interest rates four times. In 2018, the Fed hiked its benchmark interest rates four times, each by 25 basis points, as expected. Ongoing trade wars, the sharp decline in US stock markets in fourth quarter, concerns about a slowdown in global growth, and falling oil prices have led the markets to expect the Fed will slow rate hikes. Furthermore the yield curve, closely followed by market analysts and widely seen as a recession indicator, has become inverted in two- and five-year Treasury bonds, and stayed flat in ten-year bonds. This prompted the Fed to reduce its interest rate rise expectations from three to two for 2019. The Federal Reserve anticipates a single interest rate rise for 2020. The Fed also stated that its rate rises for 2019 will be data-driven, signaling that interest rates are currently near their natural rates. After starting to reduce its balance sheet in October 2017, the Fed continued the normalization process throughout 2018. Fed Chairman Powell stated that the Fed will further shrink its balance sheet of USD 4.5 trillion in 2019. In the coming year, the markets will keep close watch on changes in the Fed’s interest rate road map. The European Central Bank (ECB) continued to normalize its monetary policy by ending quantitative easing in December 2018. The ECB, which kept its interest rates unchanged in 2018, is not expected to increase rates until the second half of 2019, or until inflation approaches 2%. The ECB’s first interest rate hike is expected, at the earliest, in fourth quarter 2019, or in 2020. Following its first interest rate hike after the global crisis in 2017, the Bank of England (BoE) raised its interest rates once again in August 2018. Unlike the Fed and ECB, the Bank of Japan (BoJ), which has failed to disentangle itself from the low inflation – low growth spiral, has continued its yield curve-adjusted monetary expansion program by keeping interest rates and incentive programs unchanged. Fluctuating oil Prices were prevailed in 2018. US sanctions on Iran scheduled for November were priced in at the beginning of 2018. This led to sharp rises in oil prices, with the price of crude oil peaking above USD 76 per barrel. The US sanctions on Iran’s oil and energy exports implemented in on November 5. However, US President Donald Trump pressured OPEC (Organization of Petroleum Exporting Countries), especially Saudi Arabia, to not reduce their oil production, in order to keep the oil embargo against Iran from triggering a rise in oil prices. In addition, Trump granted a 180-day exemption to eight countries that import oil from Iran, to ensure that the embargo on Iran does not cause a supply shortage in the market. The countries benefiting from this six-month exemption are China, Greece, India, Italy, Japan, South Korea, Taiwan and Turkey. While the US offered an exemption to these nations to prevent a jump in oil prices, it tried to prevent production shortages by urging Saudi Arabia, the biggest producer within OPEC, to produce more. In November, Saudi Arabia’s oil production reached a historic high of 11 million barrels per day. At the Vienna meeting between OPEC and Russia, which is not an OPEC member, on December 6, 2018, OPEC reached an agreement concerning production in the first six months of 2019. OPEC producers agreed to reduce production by 800 thousand barrels per day. Meanwhile, Russia and other allies agreed to cut their oil production by 400 thousand barrels. This reduction of 1.2 million barrels will come into effect in January. The US-China trade war, expectations for global economic slowdown in fourth quarter, and the ensuing market expectation for a decrease in world oil demand suppress any possible rise in oil prices. The price of US crude oil, which followed a volatile course in 2018, fell to below USD 50 per barrel. In November 2018, the US started to impose its embargo on Iran. However, the six-month exemption of eight countries from the embargo was effective in bringing about a decline in oil prices. In addition, US shale oil production and the country’s transformation into a major oil exporter have strengthened the expectation that oil prices will not rise in the coming year. However, the US embargo imposed on Venezuela’s state-owned oil company to put pressure on President Nicolas Maduro, poses an upside risk for oil prices.