Weekly Update 8/17/2018 – Turkey’s Woes Continue, U.S. Holds up Relatively Well
US: S&P 500 Index 0.59%, Dow 0.97%, Nasdaq -0.29%
Europe: STOXX Europe 600 -1.24%, German DAX -1.72%, France CAC 40 -1.29%, U.K. FTSE 100 -1.41%
Asia: Japan Nikkei -0.12%, China Shanghai Composite -4.52%, Korea KOSPI -1.57%
Rates/Commodities: 10-Year Treasury yield -1 basis points to 2.86%, WTI crude oil -3.21%, COMEX gold -2.86%
Global equities sold off this week, though major U.S. indexes held up relatively well, as investors’ continued focus on Turkey, coupled with mixed economic data and commodity price weakness, stoked a resurgence in volatility.
Concerns about Turkey’s economic woes broadened to European banks, specifically those that hold Turkish debt and the extent—if any—to which they’re exposed to the plunging lira. A resurgence of the U.S. dollar and further declines in commodities also helped push foreign equities lower, with emerging markets (EM) stocks bearing the brunt of the selling pressure. However, while Turkey’s situation may be a cautionary tale for other EM countries, fears of contagion may be overblown. The country’s “growth-at-all-costs” approach over the past few years has left it with the largest current account deficit of any emerging market country, meaning it’s spending a lot more on imports that it makes on exports; and it’s on track this year to post a current account deficit that’s second only to India, whose economy is three times the size. Assessing the selloff in emerging markets, LPL Chief Investment Strategist John Lynch noted, “Aside from the fact that Turkey represents less than 1% of the MSCI Emerging Markets Index, the country’s economic woes are not representative of emerging markets overall, and we believe these bouts of selling could prove to be opportunities for appropriate investors looking to add or increase exposure to the broad emerging markets space.”
The S&P 500 Index, meanwhile, finished higher this week and remains within striking distance of record highs. The gains followed a mid-week selloff that came on the heels of economic data that showed a slowdown in manufacturing growth and a further drop in new housing starts, along with a 4% drop in copper prices that left the widely used industrial metal in bear market territory. However, the bulls managed to sustain those gains into Friday’s close with buying in defensive sectors providing support, while sentiment was buoyed by an announcement that representatives from the U.S. and China plan to hold another round of trade talks next week and better-than-expected Leading Economic Indicators.
Next week, the minutes from last month’s Federal Reserve policy meeting are due out ahead of a speech from Fed Chairman Jerome Powell on Friday. The economic calendar is highlighted by several data releases on the U.S. housing market, along with Purchasing Managers’ Index releases for the U.S., Eurozone, France, Japan, and Germany. Track these and other important events on our Weekly Global Economic & Policy Calendar.
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