Markets broke a five-week winning streak as concerns over a potential financial crisis in Turkey spooked markets today, pushing both major indices negative on the week. For the week, the Dow declined 0.6% while the S&P 500 was down 0.2%.
Turkey seems to be the latest country headed for financial crisis due to too much sovereign debt denominated in a foreign currency coupled with questionable central bank policy. President Tayyip Erdogan has pushed the financial sector to lend more while pushing the central bank to lower interest rates. This has predictably led to a sharp increase in inflation and a decline in the value of the Turkish Lira. The value of the Lira declined 20% this week relative to the US Dollar and is down over 40% in 2018. Turkey runs a trade and current account deficit. That means it needs foreign investment to close the gap and that investment has dried up over the past year. Erdogan continues to crackdown on the economy and political opposition post the attempted ‘coup’ in 2016 and that has made investors view Turkey a riskier place to invest. Turkey’s current account deficit leaves them short of US dollars or Euros to defend its currency, not a good position to be in when it has significant non-Lira denominated government debt.
All of this will put a lot of pressure on the Turkish banking sector, which could eventually require a bailout or collapse. We saw similar issues in Greece 5-6 years ago, but Turkey’s economy is four times the size of Greece. No one really knows exactly how much exposure European banks have to Turkey, but this has some potential to spread a banking crisis to other parts of Europe. It will be interesting to see how willing Europe will be to bailout the Turkish banking sector and that willingness will likely depend on how exposed European banks are to the country. I don’t see this having a significant risk to the US economy in the medium term, but it clearly caused some volatility today. Read More
Oil declined this week, decreasing 1.2% to close at $67.78/barrel. The yield on the 10-yr Treasury moved lower, closing at 2.87% from 2.95% last week. The average rate on a 30-yr fixed rate mortgage moved lower to 4.59%, from 4.60% last week.