Need to Know: Worried about Turkey? Here’s what it will take to push Wall Street’s buttons

Original post

With Turkey potentially inching toward a full-blown financial crisis, investors are rightly worried the country’s woes could spread elsewhere if its leaders can’t fix the economic mess and sort its relationship with the U.S.

“The longer the market waits [for a fix], the more contagious the crisis can be, not just to emerging market assets but to developed market ones,” warned Kit Juckes, chief fixed income and FX strategist at Société Générale, in a note to clients.

“The longer the market waits, the more contagious the crisis can be, not just to emerging market assets but to developed market ones,” warned Kit Juckes, chief fixed income and FX strategist at Société Générale, in a note to clients.

But our call of the day, from Robeco fund manager Jeroen Blokland, agrees that Turkey’s situation certainly looks ugly, he doesn’t think a crisis from Ankara will be the straw that ultimately buckles Wall Street stock market’s attempts at soaring to new heights—at least not yet.

He points out that company earnings are strong and U.S. inflation is still not a worry, with no recession threat at the moment. Barring “a full-fledged trade war that hit global growth and Turkey ruining the EM outlook,” these fundamentals provide reason to be sanguine, he said.

“So yes we could see some pullback driven by some of these factors, especially because volatility is low, but unless you expect a full-fledged trade war that hit global growth and Turkey ruining the EM outlook, these fundamentals offer some balance,” he said, in emailed comments.

Still, the crisis could hit exposed European banks, said Blokland. Indeed, investors have been backing away this morning from Spain’s BBVA BBVA, -1.87%  and France’s BNP, -3.69%

BNP, -3.69% That doesn’t mean the crisis couldn’t hit exposed European banks, some of which aren’t the strongest, said Blokland. Indeed, investors have been backing away this morning from Spain’s BBVA BBVA, -1.87%  and France’s BNP BNP, -3.69% as the EBC itself appears to be pretty worried that they are dancing too close to the Ankara fire.

Turkey’s woes could also dent sentiment on emerging markets more broadly—Blokland said they are underweight those assets and overweight developed. “EM doesn’t like less liquidity, stronger USD, trade wars. The earnings outlook is less upbeat than in DM, but valuations are more attractive,” he said.

The market

Some big U.S. inflation data is coming later, but for now, we can blame Turkey for jitters right down the line. Dow YMU8, -0.40% and S&P 500 ESU8, -0.42%  futures in the red and those for the Nasdaq NQU8, -0.50%  looking particularly stressed. On Thursday, the Nasdaq COMP, +0.04%  squeaked past to its eighth winning session, but the Dow DJIA, -0.29% and S&P SPX, -0.14%  didn’t’ fare as well.

The dollar index DXY, +0.47%  is at a one-year high, with the lira hitting fresh record lows. The euro EURUSD, -0.5466%  is suffering some contagion selling, while Europe SXXP, -0.85%  is mired in red ink, with banks bearing the brunt.

Gold GCU8, -0.17%  is treading water, while crude CLU8, +0.43% is up just a bit.

In Asia, the Nikkei NIK, -1.33%  had a pretty rough day and Hong Kong HSI, -0.84%  stocks also fell.

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The chart

It hasn’t been all bad for the lira this year, but the below chart shows how quickly the crisis has ramped up for Turkey this summer, with lira down 57% year-to-date:

MarketWatch

Lira’s pain

And pity the investors in the TUR, -3.87%  iShares MSCI Turkey ETF fund, which is down a fair it this morning and 42% year to date:

MarketWatch

No appetite

The buzz

Markets will be waiting for more on the Turkey front with expected speeches by PM Erdogan and his minister of finance and treasury, who just happens to be son-in-law Berat Albayrak.

Dropbox DBX, +9.13% is dropping after investors ignored upbeat earnings and focused on news Chief Operating Officer Dennis Woodside will leave and a post-IPO lockup on shares will expire sooner than expected.

Also reporting late, News Corp NWS, +0.65% NWSA, +0.79%  (owner of MarketWatch) posted a big surge in revenue, but a writeoff hit the bottom line and shares are down.

A judge has ordered the seizure of oil refiner Citgo Petroleum to help pay down Venezuela government debt owed to a Canadian gold miner. And that could fuel action by other Venezuelan creditors.

On the trade-war front, oil is “conspicuously missing” from China’s tariff-threat answer to the White House’s promise to hit $16 billion more in Chinese goods, notes the WSJ.

Some pretty big data is in the spotlight for Friday, with consumer prices en route, while the Federal budget is coming later.

The quote

“Don’t forget, if they have their dollars, we have our people, our God. We are working hard. Look at what we were 16 years ago and look at us now.”—That was a defiant Turkish Prime Minister Tayyip Erdogan trying to play down the currency crisis in front of supporters in Rize, in the Black Sea region of the country, last night.

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