We almost made six straight weeks of gains for the S&P 500 but a correction on Friday as a collapse in the Turkish Lira resurrected emerging market concerns, and memories of 1997/1998 Asian crisis. For those who are not old enough to remember, the Asian crisis was a sequence of currency devaluations starting in the summer of 1997, spreading through the Asian markets. The contagion started with Thailand, not an economy that you would have thought could have an impact on global markets, however the contagion it caused, did. The catalyst for the Asian crisis was the Federal Reserve’s raising interest rates. Equities around the globe fell sharply, the S&P 500 lost 20% until the IMF stepped in to lend to the emerging economies.
Donald Trump’s ability to find a way to involve himself in most situations around the globe once again played a part in the Turkish currencies day. Just as the market was starting to get jittery over Turkey, President Trump announced a doubling of tariffs put in place in retaliation for the detention of Pastor Brunson, who attempted a coup in 2016. This move was a catalyst for further falls in the lira.
Rising US interest rates alongside an appreciating dollar, as has been the case this year, causes emerging market fears. Capital gets repatriated away from these economies back to America at the same time making it harder to pay back existing loans. According to a Strategas report Turkey owes 180 billion dollars in short-term foreign currency debt. The cost of paying back that debt has rocketed over the past weeks. Many of the largest European banks are exposed to Turkish debt.
Sterling has remained under pressure this week, as much as Brexit or the Bank of England’s monetary policy takes the blame. The row over Boris Johnson’s public views on the Burka continues to split the party and has probably been as much a catalyst as anything. Talk about making a crisis out of a drama, the conservative party seem to have reached the ultimate.
The pound did not recover against the US dollar on Friday despite an improvement in second-quarter GDP. The UK economy grew by 0.4% in the second quarter as weather, weddings and the world cup success helped boost the economy.
Looking to the week ahead, markets will continue to be fixated with the Turkish lira. Those on holiday there will be benefitting from the recent events. For investors, any signs of a recovery will boost equities a further selloff will lead to further risk aversion. As usual, there is a broad range of data from the US economy, retail sales and industrial production amongst others. For the UK economy inflation and wages reports.