Cold Turkey?

In today’s news about the financial pressure being exerted on Turkey by the Trump administration, two blog posts I have made recently are brought together.

Currency fluctuation is a risk that can impact all portfolios

This is as I explained:  because many emerging economies have large amounts of US dollar denominated debt, the cost of servicing that debt goes up if the dollar appreciates relative to the currency of the debtor nation.  That is one of those ‘rule of thumb’ justifications for selling emerging market and broadly Asian stocks (although not logical for Japan and China, at least).

Tariffs have unpredictable consequences

In this case, tariffs aimed at Turkey (because they are not being nice to Donald, it seems), may lead to default on debts owned mainly by international banks, thus awakening sleeping concerns about the liquidity of the financial system when central bank money printing ends.

Thoughts

Turkey is not a small country and of course was once a significant regional power, so is unlikely to allow itself to be pushed around.  It talks about new alliances with Russia, although allowing for not such ancient history, one would not see the two countries as likely best mates.  But ‘need is must’ sometimes as the saying goes and I am sure President Putin would like more influence South West of the Black Sea.

A worry is that US foreign policy is now so ignorant that Trump sees Turkey as just another Middle Eastern country (because it is Islamic) and therefore a natural enemy of the US.  As I write that is seems bizarre, but I do believe it is possible!

It would be odd if this particular non-sensical action by Trump caused the market sell off that is rather overdue, but it will be a nervous few days.  Investors should keep an eye on events and be prepared to take any buying opportunities.

As a final thought, the Euro has been quoted as depreciating in today’s news as a contagion effect from the  Turkish currency crisis.  But it has hardly moved against Sterling – an indication of how uncertain an option the UK appears to international traders as the Brexit dithering continues.  The Pound looks likely to continue to fall against the US dollar so portfolio exposure to global trading businesses will benefit.