U.S. Stocks Plummet as Turkey Crisis Continues, Crude Oil Plunges on Unexpected Inventories Build
The major U.S. equity indexes are under pressure Wednesday following a weaker cash market opening. Investors are cutting risk and paring positions in reaction to lingering concerns over Turkey’s financial crisis. The benchmark S&P 500, the blue-chip Dow and the tech-driven NASDAQ Composite have all fallen by as much as 1 percent early in the regular session.
The over-extended technology sector is falling sharply because of valuation concerns. Banking stocks are under pressure because of contagion fears. Additionally, some investors fear that a global economic slowdown or excessive stock market volatility could encourage the U.S. Federal Reserve to pull in the reins on its plans to raise interest rates in September and December.
According to the CBOE Volatility Index (VIX), widely considered the best fear gauge in the market, volatility rose more than 13 percent to 15.13. Additionally, another fear gauge, 10-year U.S. Treasury yields, fell to 2.868 percent early Wednesday.
Turkey’s Latest Moves
Officials and policymakers in Turkey continue to push the wrong buttons, or seemingly make the wrong combination of moves to stem the selling pressure on its currency and equity markets. Major investors all seem to agree that the country’s new policy decisions have not been enough to stabilize the situation.
The latest move from Turkey was limiting banks’ currency swap transactions. This move is aimed at curbing short selling against the Lira. The problem with this decision is that it comes late in the process and should’ve been implemented last week. Turkish officials also need to be more proactive than reactive.
According to analysts at J.P. Morgan, in order to gain control of the situation, Turkish policymakers need to adjust policy rate hikes to between 5 and 10 percent, have a fiscal commitment to backstop and recapitalize banks and deal with problem loans, target fiscal support for the most distressed sectors, and a general policy framework which acknowledges the need for deleveraging and recognizes a recession is a natural side-product of this process.
Essentially, the country needs to follow the blueprints laid out by many of the central banks during the global financial crisis in 2008-2009, that is to isolate the bad loans and to flood the market with liquidity. Furthermore, Turkey needs to stop challenging the U.S. with tariffs because its economy can’t win a trade battle with the United States. Additionally, there needs to be progress made on the detention of U.S. pastor Andrew Brunson, which some say sparked the crisis in the first place.
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This article was originally posted on FX Empire
