Daily Market Color

Turkey Continues to Rattle Financial Markets


Turkey’s Crisis Deepens and Spreads?

In emerging markets, as Turkey continues to defiantly oppose raising rates or accepting an international bailout, the crisis continues to drag down the valuation of other emerging market assets.  The Turkish situation could lead to broad losses across many markets as Turkish debt and equities are broadly held by international investors.  Emerging market stocks, which suffered losses in the second quarter before rebounding in July, have given back a significant amount of that rebound.  Prior to this most recent crisis (especially during the July rebound)the Turkish Lira (TRY) and the other emerging market currencies were fairly uncorrelated, but since the crisis that correlation has hit a 1 year high.



This could be a sign that while currently the entire EM asset class is suffering along with Turkey, once things calm down, individual country performance should allow them to uncouple once again.  In the meantime, Argentina unexpectedly raised rates and took steps to stabilize the falling peso in response to the Turkey led emerging market decline.  The Central Bank raised rates for 7 day notes 5%, increasing the rate which was already the highest in the world to 45%.  In addition the policy makers planned to phase out shorter term issuance which can lead to increased currency fluctuation due to the increased risk of rolling over funding.



Risk Off on Emerging Markets Slump

The emerging markets slump continued today and all three major US equity indices were lower on this news.   The DJIA had the biggest loss of the day, falling 0.50% followed closely by the loss suffered by the S&P 500 which fell 0.40%.  The NASDAQ had the smallest decline, falling 0.25% on the day.   US Treasury Notes were mostly unchanged, as the 10 year note close at a yield near 2.88%.  In foreign exchange markets, the US Dollar (USD) posted gains of  0.1% vs the Euro (EUR) and 0.2% against the major currencies that comprise the Bloomberg Dollar Spot Index.  The TRY continued the slide losing 7.8% against the USD, while the Argentine Peso (ARS) was down 2.3% vs. the USD.  Crude oil futures fell, losing 0.4%, to close at $67.34/barrel.


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