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Turkey Plus Tesla Equals a Mixed Bag

| August 13, 2018
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Major market benchmarks ended decidedly mixed last week after another round of trade disputes, albeit from an unexpected direction, led to a sharp pullback on Friday. In retaliation for Turkey’s jailing of an American pastor, President Trump announced in a tweet that the U.S. was doubling its tariffs on steel and aluminum imports from the country. A broad decline in the Turkish lira and other emerging market currencies weighed on Wall Street and major global markets. Meanwhile, tensions between the U.S. and China continued to simmer, with China announcing new tariffs on $16 billion worth of goods imported from the United States (more on this later).

Markets received a big boost from impressive Q2 earnings reports early in the week. According to the latest available data from FactSet, earnings for the S&P 500 index are anticipated to have grown 24.6% over the same quarter a year ago. Such a result would be well above estimates before the start of the earnings reporting season and roughly in line with the Q1 pace, which was the best showing in nearly eight years.

Interestingly, the week’s most notable stock-specific event had nothing to do with earnings. Shares in electric car maker Tesla jumped on Tuesday after CEO Elon Musk tweeted that he had arranged financing and was considering taking the company private in what would be the largest leveraged buyout in history. The stock fell back over the following two days, however, as some investors questioned whether the deal would go through.

Unfortunately, an offsetting negative to positive earnings news blindsided investors, as the Turkish lira sucked oxygen from equity markets. Global currencies in general sold off, triggered by Turkey’s financial troubles that compounded worries about China’s trade fight with the U.S. After rising earlier during the week, the yuan erased its gains on Friday amid fears that Turkey’s currency woes could spill over onto the mainland. The Turkish lira plunged as much as 14% to a record low on Friday as investors worried about deteriorating relations with the U.S. The yuan’s ninth weekly decline marks the currency’s longest losing streak since China adopted its current foreign exchange regime in 1994.

The yuan’s drop against the dollar has accelerated since mid-June as trade tensions between the U.S. and China have heated up. Earlier in the week, Beijing said that it would levy 25% tariffs on an additional $16 billion worth of U.S. imports starting August 23—the same day that the U.S. plans to start collecting 25% extra in tariffs on $16 billion of Chinese goods. The escalating tariff cycle comes as the People’s Bank of China (PBOC) has stepped up efforts to stabilize the yuan.

Earlier in the week, the PBOC urged state-owned lenders to prevent “herd behavior” that could lead to runaway foreign exchange trades, Bloomberg reported. That move followed a measure the previous week that makes it more expensive for investors to bet against the yuan. Despite the bearish headlines about China, news focused on China’s slowing economy tends to obscure the significant income gains on the mainland and an increasingly consumption-driven economy.

MPCA will continue to monitor the situation in emerging markets, as we see opportunities developing amid already attractive valuations and equities that continue to sell off around trade concerns that may very well prove to be transitory.

Information from T Rowe Price was used in generating this report.

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