Emerging Markets are already suffering from a strong US dollar, rising interest rates and increasing trade tensions so this issue with Turkey could accelerate this flight of capital. This current issue in Turkey could cause a negative reaction to spread globally. Please read below.
Last week our partners sat down and studied the US equity market from a fundamental and technical standpoint and we came up with a short list of scenarios – all resulting in a small, short-term pullback to a robust, high volume correction. The results were all the same, as equity seemed to be overbought and vulnerable to a pronounced sell-off that triggered technical stop losses, likely causing the S&P 500, the Dow and Nasdaq to accelerate lower.
We do not give trade advice, but are always studying fundamentals and technical factors, volumes and charts, to get an edge on the next 3-month change in market direction. We see a change coming soon.
The current trigger is Turkey, a country that saw its currency, the lira, fall more than 14 percent to hit a record agains the US dollar, sending shock waves around the world in traded markets. The Dow, Nasdaq and S&P 500 all gave back their gains for the month on this Turkey shock. To be specific, this financial crisis in Turkey triggered a 200 point drop in the Dow index. The Dow Jones Industrial Average dropped 196.09 points to 25,313.14 as several blue chip names declined. Both Nasdaq and the S&P 500 fell, with the Nasdaq snapping an eight-day winning streak.
Bank shares suffered in the US, as Goldman, Bank of America and Morgan Stanley all dropped more than 1 percent. Note that we have seen currency issues in EM, emerging markets, in the past, so this is nothing new.
European bank exposure to Turkey is limited to only a few major banks, but this exposure is not so severe as to trigger a broad banking crisis in the European Union. Still, increasing fear is causing investors to purchase US Treasury securities while emerging markets currencies fell.
The Turkish lira briefly fell by 20 percent to a record lower after President Trump authorized the doubling of metals tariffs on Turkey. Also, note that the iShares MSCI Turkey ETF fell 14.5 percent and more importantly, this ETF is down 42.3 percent for year, prior to Friday`s losses.
Clearly the meetings in Washington between the Turkish delegation and their US counterparts, did not end in a desirable result for the US, nor Turkey. Turkey is holding American Pastor Andrew Brunson. President Trump threatened to slap on sanctions if the pastor was not released. Turkey refused.
At Classiarius, we are more concerned about the negative impact on other markets in the EM space as well as contagion to US and European Markets, and by extension, Japan and our region. China is the country that clearly does not want global financial markets to implode.