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.”
Related: Fed Likely to Increase Rates Unless Turkey Situation Worsens
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.
“There are only three options to halt the freefall of the Turkish lira,” tweeted Dani Rodrik, an economist at Harvard University. “1. Sell dollars at the expense of using up the central bank’s reserves. 2. Announce a serious rate hike. 3. Capital controls. Choose your poison.”
In addition to bonds to rising yields on Turkish bonds, the lira has been hitting all-time lows against the U.S. dollar. In an effort to prop up the currency, the Turkish central bank lowered the reserve requirement for banks by 250 basis points to improve liquidity conditions.
Adding more fuel to the flame was U.S. President Donald Trump announcing that he would double tariffs on steel and aluminum, which further hampered the Turkish lira. President Erdogan went as far as asking citizens to convert their dollars and other foreign currencies, including safe-haven assets like gold to Turkish lira.
Related: Kevin O’Leary: Turkey is a ‘Nothing Burger’
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