Last week we mentioned we had some concerns overseas. On Friday Turkey’s currency crashed. They have a government that has kept interest rates too low for too long and have also had out of control spending. Turkey’s government bonds are currently yielding 20%. Based on historical numbers, such as the 1997 Asian Crisis and the 1995 Mexican debt issue, emerging markets sold off and the S&P held up. We think this could play out in a similar manner.
We are already seeing how the Turkey situation is affecting the U.S. Markets. As there is a risk globally, people tend to run to the dollar. This is great for U.S. consumers and producing companies in the S&P. U.S. bond yields are falling and, in turn, U.S. bond prices are rising. While Turkey is a small country, it is having a large impact on how our markets are performing. However, while there has been concern over emerging markets, U.S. markets have been one of the most consistent throughout this year.
Some people have concerns over the comparison of what happened to Greece’s economy in relation to what is currently happening with Turkey. The difference is that Greece is in the European Union. Turkey is its own entity. Germany had to buy a lot of Greece’s debt. A lot of European banks that have Turkish exposure do this through joint partnerships with Turkish banks. If things get really bad the European banks could decide to walk away. This is not nearly the systematic issue that we saw with Greece.
We have seen the Fed raise rates this year because the U.S. economy is doing well. This helps short term bonds and tends to cause long term U.S. interest rates to go up, and, in turn, prices to go down. This also causes the dollar to strengthen which is really driving Turkey down. The U.S. has a stronger dollar and Turkey has a line of debt. The Turkish currency is collapsing while their debt remains the same. This causes Turkey to have more expense.
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