June 12


Fighters from Al-Qaeda related group known as the Islamic State of Iraq and al-Sham(ISIS) have swept through northern Iraq and Eastern Syria in a brazen and violent power grab.  The US trained Iraqi military is on the run. The WSJ is reporting that government troops are abandoning their posts before the insurgent forces get anywhere near. The Iraq government has already approved US airstrikes and is hoping the American military will come to the rescue.


US Stocks were shaky yesterday for the first time in two weeks as this news hit oil and local FX markets particularly hard. The Turkish Lira fell over 1.5% as the northern Iraq city of Mosul fell. It is the second largest Iraqi city with a population of 1.6 million and is close to the Turkish and Syrian borders .The Turkish consulate in Mosul was overrun by ISIS and over 80 Turks have been taken hostage including the consul general. Turkish Prime Minister Erdogan has warned about any violence against Turks and approved surveillance flights over Mosul in an emergency meeting with his cabinet yesterday. Local militias in southern Turkey are quickly mobilizing in what is an extremely unstable situation in both countries to the south.


                                                                                                                       USDTRY 1hr Chart, 2 weeks

Volatility in USDTRY is jumping as traders that owned the Lira to benefit from carry trade positions all rush to the exits. 1 month implied volatility has popped from 8.75% to 9.8% in one day as the market has been caught short volatility, 1 week vol trades at 11.50% as of this morning. The Iraq news seems to have understandably overshadowed positive growth figures out of Turkey on Monday that showed the economy grew by 4.3% in Q1. This data is a good sign for local fundamentals as many thought that January’s onerous rate hikes would slow the nation’s growth. On a macro level the ECB’s new easing measures have also sent investors on the yield hunt again, making for a positive backdrop for carry trades.

Commodity markets are also jittery as WTI and Brent are both higher as ISIS has focused on sacking oil rich areas which will likely disrupt supply.  WTI has broken to new 2014 highs above the recent 5 month range between $98 and $105. Last year’s data showed Iraq to have been the 7th largest global supplier of oil, selling 3.75% of the global total. Syrian output is unstable in the midst of the ongoing two year Syrian civil war, producing around 0.50% of the global total. Gold was relatively stable after declines earlier in the month likely washed out all the short term safety players that got long on Ukraine nervousness.

                                                                                                  West Texas Intermediate (Oil), Daily Chart, Year to Date

Going forward it looks like market reaction will be based on how Erdogan and Obama respond to the swift and embarrassing fall of large swathes of Iraq. The insurgents are intent on taking Baghdad, and if that occurs visibility on the outcomes is quite limited. Obama’s response will determine the sentiment for US stocks and Oil, with Erdogan headlines beating the path for the Lira. For now it seems that ISIS is intent on casually taking control of the government, as they assume control of cities and order citizens back to business as usual. It is unclear if anything can be done to stop the group. Fears sweeping throughout the media offer fade entry points on selling oil and buying the Lira, or opportunities for new medium term trends to develop. I would keep stop losses tight on fades, trade safely in headline driven situations.