August 9, 2018

The major stock market averages opened mixed this morning (Dow -30 pts; SPX flat). It’s still a trader’s market with lots of back-and-forth but no trend. But now we’re in August and there’s no trade volume to speak of. So in some respects the day-to-day commentary doesn’t matter much. Today’s trade action—defensives leading; cyclicals mostly lagging; foreign markets lower—is exactly the opposite of what we saw earlier this week. The VIX Index—which attempts to measure investor fear—is down around 10.8. The dollar is appreciating in value against a basket of foreign currencies, and is now up 3.5% on the year. WTI crude oil is up modestly to trade around $67.10/barrel. Bonds are trading slightly higher today. The 5-year and 10-year Treasury yields are back down around 2.81% and 2.94%, respectively.  

Turkey is facing a currency crisis. It’s true that Brazil and Italy and China and South Africa have seen their currencies weaken substantially in recent months. But the situation with the Turkish Lira seems far worse. It has now plunged to a record low (down about 30%) against the dollar and bond yields in Turkey are spiking. There’s a couple of things going on here. First, as I mentioned last May, the Turkish government has been hesitant to support the Lira. Typically, countries use monetary policy (i.e. interest rate hikes) to help cushion the blow when the their currencies fall in value. This is especially the case with emerging countries because often their governments issue dollar-denominated bonds, and paying the interest on those bonds gets a lot more expensive when the local currency loses value. So you can see that US dollar strength is sort of the arch enemy of government spending budgets abroad. Second, Turkey’s inflation is running in the double-digits and global investors are pulling out of Turkish investments. Third, geopolitics is also playing a big part in Turkey’s trouble. State-owned bank Halkbank is under investigation by the US Treasury for scheming to evade US sanctions on Iran. Separately, Turkey continues to detain a US citizen it says helped with an attempted coup two years ago, and the Treasury Department is threatening to sanction some top Turkish officials. Anyway, in local currency terms, Turkey’s stock market is down 15% this year, but in dollar terms it’s down over 40%. Emerging markets in general fared very well in the first quarter of this year, but since then have underperformed the S&P 500 by about 15 percentage points. 

The Producer Price Index (PPI) decelerated slightly in July, which is good news for manufacturers. PPI measures wholesale inflation and we know that the cost of all kinds of inputs—oil, gasoline, lumber, transportation, steel, labor—have been rising. PPI has accelerated to 3.3% y/y growth from 2% just one year ago. Excluding the more volatile categories of food & energy, PPI stepped down to a 2.7% annual rate in July vs. 2.8% in the prior month. So this is a bit of a relief, and it’s probably the sole reason why interest rates ticked down today. 

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