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Commentary on financial markets – August 2018


  • Turkey: low interest rates, high inflation and the fall of the Turkish lira
  • US: Q2 GDP growth +4.2%, tariff agreement with Mexico


The stock market situation is starting to turn around and markets, except the US one, are gradually retreating from their highs. The main reason for this is political risks, which have mainly to do with US foreign and trade policy. However, the risk factors are also being compounded by concerns about the situation in the emerging markets, which are beginning to bear the brunt of the tightening of US monetary policy and the strength of the US dollar.

This is most evident in Turkey, where the currency there has at one point lost around a quarter of its value since the beginning of August (indeed, on an annualised basis it has lost almost half of its value). While the trigger for the sell-off was mainly the political spat between the US and Turkey over the release of the American pastor, Turkey’s problems are much deeper and are mainly related to an overheating economy, high inflation and yet insufficiently tight monetary policy (low interest rates), which is leading to a gradual loss of confidence in the lira itself.

In the global economy, however, Turkey is not an isolated country; its problems are also significantly affecting Europe, as confirmed by the European Central Bank, which has drawn attention to the exposure of European banks to the Turkish economy, which is around EUR 80 billion in the case of Spain alone. The political risks on the markets thus seem to be gradually increasing, which is having a negative impact on share prices.

The last giant to outperform the average of global equities over the last six months is the US, despite being in a trade war with virtually all the big players around the world. Nevertheless, the US economy grew +4.2% y/y in Q2 and, on top of that, it seems to have managed to negotiate better international trade terms for itself. The fresh agreement between the US and Mexico, which is mainly targeted at automotive and agricultural production, is a case in point. The new agreement removes all reciprocal tariffs in international trade for both countries. By contrast, the tough stance towards China remains unchanged, and both countries are imposing further tariffs on each other or, at least, threatening to increase them.

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