Weekly Digest: Ruffled Feathers
21 Aug 2018
Animal spirits in investment markets have evaporated over the past two weeks, with Turkey suddenly claiming the limelight as a posterchild for a mismanaged emerging market economy, whose weaknesses have been exposed as they have become the latest focus for American diplomatic ire - expressed through commercial penalties.
This Turkish Bath now has investors sweating about the possibility of contagion into shares more widely, as Global Equity Markets in aggregate have fallen by 2% month to date and are now 1% down Year to date in Dollar terms. The contagion is feared to come through two routes. Firstly through Emerging Markets, where share prices measured in Dollars have fallen by 6% over the month. Those countries with large balance of payments deficits and high levels of local debt financed from overseas in foreign currencies, similar to Turkey, have seen particularly sharp falls in their currencies and shares. The second source of contagion is feared to be through cross border linkages into Developed Markets. Some demand softening for foreign goods is inevitable, but the real fear is that banks outside Turkey could lose money on any loans they have made to Turkish borrowers whose cash flows will be hurt both by higher import costs alongside increased obligations on any non-Lira debt they might have committed-to. If these losses are large enough to restrict these non-Turkish banks’ ability to conduct “business as usual” in their home markets, Turkish problems could have a knock-on effect.
FTSE 100 Weekly Winners
|Direct Line Insurance Group||3.1%|
|RSA Insurance Group||2.0%|
FTSE 100 Weekly Losers
|Randgold Resources Limited||-6.8%|
However, these are not normal circumstances. The Dollar has hitherto only been “weaponised” against the most serious of enemies to both America and the Western alliance. By using Trade sanctions against Turkey in a relatively low-level diplomatic confrontation, the Trump administration heightens concerns about the deterioration of relationships with China and other trading partners. Heightened fear about the ready availability of the world’s functional trading currency effectively tightens liquidity (hoarding of Dollars) and is not friendly to growth.
For now, global corporations appear to be more relaxed than investors. Buoyed by firm order books they are delivering good results and do not appear to be retrenching. The consensus expects that Donald Trump will declare victory against China shortly before the Mid-Term elections, before materially damaging global growth prospects. Global corporate credit spreads (the price of borrowing) and financial sector share prices should be watched closely for signals that this may be too complacent a judgement. For now the verdict appears to be that “this too will pass”.
Year to Date Market Performance
FTSE 100 Index, Past 12 Months
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