Market Watch – August 17, 2018
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Big Picture – By Bill Curry
Markets Recover as Concerns Ease Over Turkish Lira, Trade Conflict
North American markets recovered ground on Thursday during a week that started ominously for financial markets in general – and emerging-market currencies specifically. The Turkish lira hit fresh record lows on Monday, while South Africa’s rand fell significantly against the greenback and the Chinese yuan continued its downward trajectory. Although the lira stabilized somewhat as the week progressed, there’s still real concerns for Turkey, emerging markets and even the European Union. The weakening currencies are driving up the cost of servicing dollar-denominated debt in emerging markets – at a time when investors are already wary. Lending in dollars to developing economies has boomed since the financial crisis—as of Q1 this year, nearly $2.5 trillion was outstanding. The precarious lira could also become a problem for Europe, as Turkey is the European Union’s fifth-largest market. There’s some
concern for Europe’s financial sector as Spanish and French banks have collectively lent $116 billion to banks based in Turkey –in Q1 alone.
While signs that the U.S. and China were willing to resume trade negotiations helped to boost markets Thursday, it’s become clearer that China’s economy is cooling. The economy is still expanding, but retail sales have slowed and unemployment is ticking up. If the two superpowers soon return to the bargaining table, the U.S. should have the upper hand.
