The fundamentals for the Turkish economy are pretty weak. Strong growth has been secured at the expense of high inflation, a balance of payments deficit and high external dollar borrowing. With interest rates, already well into double figures, markets were calling for short interest rates to rise into the mid twenties to combat inflation and stabilize the currency.
The Trump tariffs were the trigger for collapse in the Lira. The currency fell by 20% against the Dollar last week. Contagion fears pushed markets lower in Europe and the UK. Stocks fell in China, Hong Kong and Japan as fears of trade wars increased.
Emerging markets came under pressure. Currencies in Argentina, South Africa, Thailand and even India came under threat as sentiment flowed in favour of Uncle Sam and the currency of choice. It's all about the Dollar. The Fed plans further rate hikes this year on the back of strong growth and rising inflation.
The
impact of the tariffs were slightly irrelevant. Turkey exports just $1.5 billion in metals to the USA. The geo political significance of the move was more significant. The US is prepared to move against an ally on the strength of a whim from the White House. Turkey is planning to buy the S-400 missile defence system from Moscow. Trump threatened to pull the sale of US F-35s to Turkey. Does that make sense? Not really.
Trump is upset. "Turkey has taken advantage of the United States for many years." he tweeted. "They are now holding our wonderful Christian Pastor hostage. We are cutting back on Turkey!".
The message to friend and foe alike is evident. Strategic partnerships do not from part of Trump diplomacy. There is no think through on actions taken. Russia interests will be strengthened in Eastern Europe. China's interests will be accelerated around the world. Membership of NATO will no longer make much sense to the buffer state. Russia and China were quick to offer support both in terms of trade and finance to Ankara.
As for contagion, the real threat of spread is limited. This is not a prelude to the financial collapse of 2008, nor is it likely to be as significant as the "taper tantrum" of 2013. Emerging markets are in better shape, with lower inflation, higher foreign reserves and flexible exchange rates. With the exception of Argentina perhaps, the major problems are unique to Turkey.
The Turkish economy grew by over 7% in the first half of the year. Inflation hit 16% in July. A rising balance of payments deficit funded by dollar borrowing led to a hike in risk spreads on the currency. Trump's tariffs were the catalyst for the Lira collapse not the cause. Should we be worried? Not really
It is August, most traders are away on holiday. Those at their desks will delight in Turkish turmoil for now. The fundamentals remain strong for the world economy. Once the mid terms are out of the way, we expect peace to break out amongst the threat of trade wars. Making America Great Again will become the priority. It will not be achieved by punitive tariffs and sanctions often in contradiction of American interests ...
| 
