Just when the United States capital markets thought they got a reprieve, the effects of Turkey’s economic crisis struck again with the Dow Jones Industrial Average dropping over 300 points in the early market session. The S&P 500 and Nasdaq Composite weren’t immune to the Turkey contagion as both were down over 30 points and 100 points, respectively.
“It looks like we took a breather yesterday but it seems like there is a bit of a contagion effect,” said Jack Ablin, founding partner of Cresset Wealth. “Commodities are down, currencies are down” and emerging markets are down. “I don’t think I can sit here and tell you this is going away.”
Turkish President Recep Tayyip Erdogan is caught in the middle of an economic hurricane as the local currency continues to devalue. In addition, rising yields on Turkish bonds have rocketed past the 20% yield level.
Despite pressure from economic advisors, Erdogan prefers interest rates to stay as low as possible, going as far as to say “interest rates should be kept to a minimum because they are a tool of exploitation that makes the poor poorer and the rich richer.”
Today’s drawdown came as a result of Turkish delegation leaving Washington without gaining any progress on the detention of U.S. pastor Andrew Brunson, which increased the chances for U.S. sanctions. As far as resolving Turkey’s ongoing issues, it will take more than just an interest rate hike, according to economists.