Weekly Market Update: US sanctions further Turkish instability

Read our full Market Update Week 32

Market Update

As the pound continued its decline into last week, in local terms equity markets fell across the board aside from UK equities which made a +0.6% return. In Sterling all markets were up bar European equities, with US and global equities gaining the most with +1.9% and +1.5% respectively. Japan followed with +1.3% (-1.3% in JPY), boosted by the strong Yen as investors sought safe-haven assets, while EM currencies, such as the Turkish Lira, South African Rand and Mexican Peso, suffered. EM markets returned +1.1% in Sterling (-1.0% in local terms) while European equities fell by -0.6%. The Pound fell most significantly against the Yen (-2.2%), followed by the Dollar at -1.9% and the Euro with a -0.5% drop. Government yields reversed the previous week’s gains, falling across the board. UK 10Y Gilt yields and German 10Y Bund yields were both down 3.3bps and US 10Y Treasury yields were down 2.3bps. In the commodities space Oil fell -1.3%, Gold fell by -0.2%, while Metals returned +0.6% In USD terms.

CIO Analysis

The fall in Turkey’s currency and stock market, compared to that of China and Europe, show how the threat of trade wars/sanctions is far greater for smaller economies. Although the Chinese Renminbi is down c.9% from its highs vs USD, and the Chinese stock market is down c.28%, Turkey has fared even worse. The Turkish stock market is down c.25% and its currency has fallen c.45% year-to-date. There are real worries of instability in Turkey, with its often controversial president Recep Erdogan calling on Turks to buy Lira to help prop up the currency. Remember this is a country still recovering from an attempted coup in July 2016. Yes, China has had to make some policy adjustments and may lose out economically from US tariffs, but its ability to apply its own tariffs at least means that the US has to tread carefully, something that is not the case with Turkey, while its huge internal market makes any tariffs unlikely to cause instability in the country. The same is true of Europe, where the Euro and stocks are down both down around 8% from their highs, but any instability is more likely to come from internal factors (such as the rise of populist parties) as opposed to any external pressure from tariffs/sanctions.

David Baker, CIO