U.S. Equities Retreat, Treasury Yields Plunge as Turkish Lira Tumbles on Global Credit Contagion Fears

Weighing on equities were worries of financial and currency turmoil in Turkey as well as continued tariff retaliation between the United States and China. U.S. government debt yields plunged on Friday as global credit contagion fears surrounding Turkey encouraged asset managers to aggressively move money into relatively safer assets. Consumer prices continued to rise in July, indicating a gradual increase in inflation pressures and suggesting further interest rate hikes from the Federal Reserve. The Turkish Lira collapsed to an all-time low against the U.S. Dollar Friday even as Turkey’s leader, President Recep Erdogan downplayed the concerns, telling Turks “we have our God.”
James Hyerczyk
Contagion Risks
Contagion Risks

The major U.S. stock indexes finished mixed last week with the S&P 500 Index posting a lower close for the first time since the week-ending June 29. Weighing on equities were worries of financial and currency turmoil in Turkey as well as continued tariff retaliation between the United States and China.

For the week, the benchmark S&P 500 Index settled at 2,833.28, down 0.2%. For the year, it’s up 6.0%. The blue chip Dow Jones Industrial Average closed at 25,313.14, down 0.6%. It’s up 2.4% in 2018. The tech-based NASDAQ Composite ended the week at 7,841.87, down 0.4%. It has gained 13.6% this year.

At mid-week, the S&P 500 Index had climbed to within half a percent of its all-time high set back in late January before profit-takers stopped the rally and fueled the weakness into Friday’s close.

Despite the weekly setback, the markets have proved to be resilient for a little over a month. Investors have had to overcome political turmoil, global trade spats and worries over rising interest rates. At the same time, healthy economic data and record corporate profits have helped underpin the indexes.

U.S. Treasury Instruments

U.S. government debt yields plunged on Friday as global credit contagion fears surrounding Turkey encouraged asset managers to aggressively move money into relatively safer assets.

The yield on the benchmark 10-year Treasury note fell 6 basis points to 2.873 percent, while the yield on the 30-year Treasury bond dropped 5 basis points to 3.03 percent.

U.S. Economic News

Consumer prices continued to rise in July, indicating a gradual increase in inflation pressures and suggesting further interest rate hikes from the Federal Reserve.

According to the U.S. Labor Department, the Consumer Price Index advanced 0.2 percent, the bulk of which was due to a rise in the cost of shelter. The CPI rose 0.1 percent in June. In the last year through July, the CPI increased 2.9 percent, matching the increase in June.

The so-called Core CPI rose 0.2 percent. The annual increase of the index which excludes the volatile food and energy components, was 2.4 percent, the largest rise since September 2008. Economists polled had forecast both the CPI and core CPI rising 0.2 percent in July.

Geopolitical Events

The Turkish Lira collapsed to an all-time low against the U.S. Dollar Friday even as Turkey’s leader, President Recep Erdogan downplayed the concerns, telling Turks “we have our God.”

The Lira fell more than 18 percent after President Donald Trump authorized the doubling of metals tariffs on Turkey.

Trump’s comment came after Turkish President Erdogan asked citizens to “change the Euros, the Dollars and the gold that you are keeping beneath your pillows into lira,” noting this is “a domestic and national struggle.”

Fear of contagion due to the events in Turkey also triggered a steep break in the Euro on concerns that some Euro Zone banks faced exposure to struggling Turkish banks.

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