What is the war between Turkey and Syria all about?
After the first World War the Kurdish people were left without a nation of their own. As a result, many Kurds ended up living in Turkey, Syria, Iraq and Iran.
In the 1980's there was a violent clash between Turkey and some Kurdish people living within Turkey who wanted to establish a Kurdish state within the country. The group is known as the Kurdistan's Worker's Party (PKK) and are considered to be a terrorist organisation by the EU, US and Turkey itself.
Now, as a consequence of the instability caused by the Arab Spring a Syrian affiliate of the PKK, known as the People's Protection Units (YPG), took control of a region in northeastern Syria.
Although the YPG state they are not directly linked to the PKK, the majority of experts say they share close ties. The YPG declared this region a semi-autonomous 'statelet'. This same group, the YPG, also took the lead of the Syrian Democratic Forces (SDF), a military alliance supported by the US led coalition against the Islamic State Group.
In short, the YPG were very helpful to the US in
fighting ISIS as it tried to set up its caliphate on the back of the
instability caused by the Arab Spring.
President Trump's withdrawal of US troops from Northeast Syria prompts Turkey's attack
Turkey considered this semi-independent state on their border a potentially lethal threat to their security as they feared the PKK could hide in and attack Turkey from this region. So, when US President Trump announced a surprise withdrawal of US troops from Syria this gave Turkey's President Erdogan an opportunity to attack the 'semi-independent' state.
Turkey said they were fighting terrorists, while others saw an opportunity at a land grab which endangered many innocent civilians.
How did President Trump respond?
The response from President Trump was to urge Turkey to show restraint. President Trump threatened to destroy Turkey's economy:
He also recognised the long-standing tensions between the Kurds and Turkey.
Finally, President Trump issued sanctions on Turkey on October 14 putting their steel tariffs back up to 50%, stopping negotiations on a $100bln trade deal and threatening the potential of a whole range of further potential tariffs.
This is a warning that he has repeated a number of times since October 14 saying that if Turkey 'misbehaves' the US will tariff its imports and put sanctions on its economy. There is currently a ceasefire which ends on October 22.
What impact will this have on the global economy?
The impact will depend on how the situation either escalates or de-escalates. If Turkey press on with further military moves, after the present 5-day ceasefire, this will agitate the US further and sanctions on Turkey will follow.
US administration is particularly concerned about the formerly KPG occupied city of Kobani in Northern Syria which is immediately south of the border with Turkey.
The impact on the Lira
Turkey's currency, the Lira, suffered a crisis a year ago, due in part to U.S sanctions and tariffs, so any further sanctions will weaken the Lira again. The Lira hit 4-week lows against the USD when Turkey attacked Kurdish forces in northeast Syria.
On October 22 Senior US administration said that any Turkish Kinetic positions after 120 hours (the 5-day ceasefire) will lead to the US concluding that Turkey has violated their agreement with inevitable consequences of sanctions. Therefore, the first impact that further sanctions will have will be on more weakness for the Lira to last year's crisis highs of 6.4000 and above.
Flows into the risk currencies of the JPY and the CHF
There would be an instant bid into safe haven currencies if Turkey went ahead with a major military move into Syria. Despite the Swiss National Bank and the Bank of Japan having negative interest rates, their currencies are considered to be the safest currencies to buy in the result of a crisis.
The JPY and the CHF would be bought on risk off flows with the high beta currencies, like the AUD and NZD particularly vulnerable to being sold in that scenario. AUDJPY, AUDCHF, NZDJPY, and NZDCHF would all find sellers.
Global stocks would fall if the conflict was severe
Turkey fighting a war in Syria risks bringing other large players into a theatre of war. Turkey is a NATO member, so in theory NATO could move in as a player to support Turkey if Syria fought back.
Syria is backed by Russia and President Bashar Assad has angrily responded to Erdogan's forces on Syrian soil. The potential for multiple players making this conflict worse is real and would then drag down not only the US indices but also indices around the world.
Equity investors are very sensitive to risk and we would see outflow from equity markets around the world. The stocks likely to find support in such times would be defensive stocks for companies which provide essentials like food products and energy supplies.
Gold would find bids, but Copper and Iron Ore would fall.
Gold should find bids if Turkey engage the YPG in Syria due to its safe-haven status. The extent of those bids would depend on the perceived severity of the conflict and the length of it. Iron Ore and Copper prices should fall as slower global growth prospects would weigh on their demand levels.
The extent of the impact on global markets would also depend on how other negotiations play out.
The impact would also depend on how other large negotiations play out with US-China trade talks ongoing and Brexit talks possibly entering closing stages for PM Johnson's trade deal.
If US-China talks went badly, Brexit turned sour and Turkey presses on with a military offensive into North Eastern Syria then the above impact on the global market would be amplified.
This article was submitted by CMS Prime.
