8/17/2018 Weekly Update: The Trouble with Turkey
by Zach Marsh on Aug 17, 2018
S&P 500 +0.67%
10 Year Treasury +0.12%
Weekly Update: The Trouble with Turkey
The past couple weeks we have begun to see tremors in developing, or emerging markets. Between July 31st and August 13th the Turkish Lira, which had been steadily declining vs the US dollar since the beginning of the 2008 financial crisis, fell 30%, sending its stock market plummeting, and causing reverberations across the both the emerging market stock and bond sectors. The MSCI Emerging Market Index fell over 8% between July 31st and August 15th. EMB, JP Morgan’s Emerging Market Bond ETF, fell nearly 3.5% from July 31 to the lows on August 13th.
The developed international stock markets have also been feeling the effects of this growing concern. EFA, iShares MSCI EAFE Index, which includes Europe and developed Asia and Australian markets was down over 4% this month as of Wednesday this week. The US stock market had been largely unaffected by these overseas troubles. But on Wednesday the Dow Jones Industrial Average fell 350 points before recovering much of the loss later in the day. Since then the market has jumped back dramatically, throwing off emerging market concerns on the hopes of renewed trade talks between the US and China later this month.
Yesterday’s rally notwithstanding, the mounting concern over a financially strapped country’s ability to repay its debt has the potential to be more than just a two week concern. Since the Federal Reserve began raising rates back in December 2015, it seems as if the market has been on the lookout for the next potential credit crisis. In early 2016, we witnessed a panic of sorts in the high yield US bond market, which ultimately provided a nice buying opportunity for those willing to assume the risk. Now the market has turned its attention to emerging market debt. There is a saying in the stock market that rising tides lift all boats, but it’s not until the tide rolls back out that the barnacles are observed. Along the same lines, low interest rate periods ease the ability of riskier borrowers to take on debt. Easy credit periods entice nations and governments to borrow and spend more. The spending helps secure power for the parties in charge, but when the tide begins to roll out the potential contagion effect becomes a bit more exposed. If the trouble is limited to just Turkey the issue will be contained, but frequently the lenders to one of these nations is also a lender to other nations in similar financial positions. This can create belt tightening across the board, and ultimately leading to race to find a chair before the music stops.
How this particular trouble spot plays out is still up in the air. Maybe it turns out to be a good buying opportunity in the emerging market space, perhaps it becomes a deteriorating situation like the “Asian Contagion” of 1997. That crisis began with troubles in Thailand before spreading to many of the surrounding countries. That mini-crisis caused the US stock market to decline nearly 13.5% in one week in October. The market recovered, but an aftershock debt crisis played out one year later in Russia, this time the market fell over 22% between July and October. Whichever way the troubles with Turkey play out, I suspect we have not seen the end of the looming credit crisis, wherever it materializes.
Thanks for reading,
Zach and Dave
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