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World

What a Russian invasion of Ukraine would mean for markets as White House warns attack could come ‘any day now’

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Investors on Friday got a taste of the sort of market shock that could come if Russia invades Ukraine.

The spark came as Jake Sullivan, the White House national security adviser, warned Friday afternoon that Russia could attack Ukraine “any day now,” with Russia’s military prepared to begin an invasion if ordered by Russian President Vladimir Putin.

U.S. stocks extended a selloff to end sharply lower, with the Dow Jones Industrial Average
DJIA,
-1.43%
dropping more than 500 points and the S&P 500
SPX,
-1.90%
sinking 1.9%; oil futures
CL.1,
+0.86%
surged to a seven-year high that has crude within hailing distance of $100 a barrel; and a round of buying interest in traditional safe-haven assets pulled down Treasury yields while lifting gold, the U.S. dollar and the Japanese yen.

Putin and U.S. President Joe Biden were slated to talk by phone Saturday in an effort to defuse tensions.

Analysts and investors have debated the lasting effects of an invasion on financial markets. Here’s what investors need to know.

Energy prices set to surge

Energy prices are expected to soar in the event of an invasion, likely sending the price of crude above the $100-a-barrel threshold for the first time since 2014.

“I think if a war breaks out between Russia and Ukraine, $100 a barrel will be almost assured,” Phil Flynn, market analyst at Price Futures Group, told MarketWatch. U.S. benchmark oil futures
CL00,
+0.86%

CLH22,
+0.86%
ended at a seven-year high of $93.10 on Friday, while Brent crude
BRN00,
+0.70%

BRNJ22,
+0.70%,
” the global benchmark closed at $94.44 a barrel.

“More than likely we will spike hard and then drop. The $100-a-barrel area is more likely because inventories are tightest they have been in years,” Flynn said, explaining that a monthly report Friday from the International Energy Agency warning that the crude market was set to tighten further makes any potential supply disruption “all that more ominous.”

Beyond crude, Russia’s role as a key supplier of natural gas to Western Europe could send prices in the region soaring. Overall, spiking energy prices in Europe and around the world would be the most likely way a Russian invasion would stoke volatility across financial markets, analysts said.

Fed vs. flight to quality

Treasurys are among the most popular havens for investors during bouts of geopolitical uncertainty, so it was no surprise to see yields slide across the curve Friday afternoon. Treasury yields, which move the opposite direction of prices, were vulnerable to a pullback after surging Thursday in the wake of a hotter-than-expected January inflation report that saw traders price in aggressive rate increases by the Federal Reserve beginning with a potential half-point hike in March.

Analysts and investors debated how fighting in Ukraine could affect the Federal Reserve’s plans for tightening monetary policy.

If Ukraine is attacked “it adds more credence to our view that the Fed will be more dovish than the market currently believes as the war would make the outlook even more uncertain,” said Jay Hatfield, chief investment officer at Infrastructure Capital Management, in emailed comments.

Others argued that a jump in energy prices would be likely to underline the Fed’s worries over inflation.

Stocks and geopolitics

Uncertainty and the resulting volatility could make for more rough sledding for stocks in the near term, but analysts noted that U.S. equities have tended to get over geopolitical shocks relatively quickly.

“You can’t minimize what today’s news could mean on that part of the world and the people impacted, but from an investment point of view we need to remember that major geopolitical events historically haven’t moved stocks much,” said Ryan Detrick, chief market strategist at LPL Financial, in a note, pointing to the chart below:


LPL Financial

Indeed, the takeaway from past geopolitical crises may be that it’s best not to sell into a panic, wrote MarketWatch columnist Mark Hulbert in September.

He noted data compiled by Ned Davis Research examining the 28 worst political or economic crises over the six decades before the 9/11 attacks in 2001. In 19 cases, the Dow was higher six months after the crisis began. The average six-month gain following all 28 crises was 2.3%. In the aftermath of 9/11, which left markets closed for several days, the Dow fell 17.5% at its low but recovered to trade above its Sept. 10 level by Oct. 26, six weeks later.

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World

Erdogan blames Turkey’s currency woes on ‘foreign financial tools’ as central bank reserves fall

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People doing shopping at the local market in Istanbul, Turkey on December 5th, 2021. The depreciation of the Turkish lira weakened the purchasing power of citizens.

Erhan Demirtas | NurPhoto via Getty Images

Turkish President Recep Tayyip Erdogan has pledged to bring down his country’s soaring inflation, which hit 36% in December, as the country’s central bank gears up for another rate-setting meeting next week.

Speaking in Parliament on Wednesday, Erdogan said he was protecting the country’s economy from attacks by “foreign financial tools that can disrupt the financial system,” according to a translation by Reuters.

“The swelling inflation is not in line with the realities of our country,” the president added, vowing that recently announced government measures to support the severely weakened lira would soon tame “unjust” price hikes.

Economists commenting on the news were not impressed.

“More complete and utter rubbish from Erdogan,” Timothy Ash, emerging markets strategist at Bluebay Asset Management, wrote in an email note shortly after the speech.

“Foreign institutional investors don’t want to invest in Turkey because of the absolutely crazy monetary policy settings imposed by Erdogan,” he wrote. “There is NO foreign plot.”

Turkey’s lira lost 44% of its value in 2021, due in large part to a refusal by the president — who essentially controls the levers of the Turkish central bank — to raise interest rates to rein in inflation. And Turks themselves are looking beyond the lira as they lose hope in their own currency: Turkish stores are now starting to display prices in U.S. dollars, and Turks are putting their money into cryptocurrencies like bitcoin and ether.

“If RTE [Recep Tayyip Erdogan] wants to save the lira, and maybe his own skin, he should adopt a USD-based currency board,” Steve Hanke, an economist at Johns Hopkins University, wrote on Twitter on Wednesday, saying Turkey is “spontaneously dollarizing.”

His tweet featured an article by Israeli daily Haaretz entitled “Even the Turkish Lira stopped believing in Erdogan.”

Dropping central bank reserves

An avowed opponent of interest rates, Erdogan instead outlined an alternative set of measures to bolster the lira. The plan essentially entails protecting local depositors against market volatility by paying them the difference if the lira’s decline against hard currencies surpass banks’ interest rates.

Critics say this plan is unsustainable, and is essentially one large hidden interest rate hike. And central bank reserves are already falling: Central bank gross reserves decreased by $1.6 billion to $109.4 billion in the first week of January, according to Goldman Sachs, “driven by the decline in foreign currency reserves which stood at US$71.0 billion.”

The state’s currency interventions, spending dollars to buy lira in order to stabilize it, have been costly.

The lira appeared to be in free fall in mid-December, dropping as low as 18 to the dollar before the government announced its rescue plan. The intervention has managed to bring the currency back to just under 14 to the dollar and keep stable there for the past week, though that’s a dramatic fall from its level of 7 to the dollar just one year ago.

The picture isn’t entirely bleak: Turkey showed positive figures for industrial production and retail sales in November, which “suggested that Turkey’s economy held up well during the early part of the currency crisis,” wrote Jason Tuvey, senior emerging markets economist at Capital Economics.

“But we doubt that this strength will last for much longer as the more pernicious effects created by very large falls in the lira in December filter through,” Tuvey added.

“While export sectors may hold up well, consumer-led ones will suffer amid a surge in inflation, which hit 36.1% y/y in December and is set to rise further.” 

How long can this last?

Analysts estimate Turkey’s short-term debt to be just above $180 billion, with a current account deficit of around $10-$20 billion, leaving gross external financing requirements at around $200 billion. With central bank gross reserves at about $109 billion and likely to keep dropping with dollarization, spending to support the lira and potential further foreign capital flight, financing for that currency reserve coverage does not look very strong.

So how long can the central bank keep intervening to prop up the lira? “The answer is not very long if it continues to keep up the pace of intervention seen in December, which remember only held the lira flat over the month,” Ash wrote.

Meanwhile, Erdogan continues to push his own economic theories, insisting Wednesday that the link between interest rates and inflation have long been disregarded in some other countries — a comment that some critics have noted would liken Turkey to Argentina, Venezuela or Iran in terms of monetary policy.

“I worry about the messaging now to foreign investors,” Ash wrote.

“Erdogan is telling the world that Turkey does not need foreign capital, foreign portfolio investors are not welcome and Turks can finance their own economy. His economic policy mantra is already not liked … Investors I think are asking themselves why they should continue to finance bad policies from the Erdogan administration? Will any new issue money just disappear in ineffective and idiotic FX intervention, and is Turkey heading to a systemic crisis?”

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Business

Turkish lira whipsaws from historic low after Erdogan announces rescue plan

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A money changer holds Turkish lira and U.S. dollar banknotes at a currency exchange office in Ankara, Turkey December 16, 2021.

Cagla Gurdogan | Reuters

Turkey’s lira has charged back from record lows at breakneck speed, seeing wild swings after President Recep Tayyip Erdogan revealed a plan to support the battered currency and protect local deposits against market moves.

The lira hit a day high of 11.0935 per dollar in early trading Tuesday — gaining as much as 20% against the dollar — but later pared some gains to trade at 12.77 around 2 p.m. in Istanbul. It marks a dramatic improvement from a record low of more than 18 to the greenback hit Monday before the president’s announcement.

Despite the wild swings, the lira is still down more than 40% against the dollar year-to-date.

In a speech Monday evening, Erdogan outlined steps to guarantee savings in lira, saying that the government will step in and make up losses to lira deposits if their value against hard currencies falls beyond the interest rates set by banks.

It’s an unconventional approach chosen by a president with unconventional economic beliefs: Erdogan has long railed against interest rates, calling them the “mother of all evil” and insisting that increased rates cause inflation, rather than cool it down.

His longtime refusal to raise rates and apparent control over central bank monetary policy has played a large part in the lira’s historic plummet that’s seen it go from around 3 to the dollar in 2016 to 18 to the dollar this week. Inflation in Turkey currently sits at 21%.

The details?

Concrete details on the president’s scheme are still yet to be seen — and analysts are skeptical.

“The recent move is clearly very significant but it is also worth noting that the Lira only recovered the losses it made in the last two weeks and the depreciation year-to-date is still very sizeable,” Goldman Sachs analysts wrote in a note Tuesday.

Ultimately, the measures don’t appear to address the fundamental issues that have led to high inflation and currency depreciation in the first place.

And deposit holders with access to loans at rates similar to the national interest rate “[have] the incentive to borrow to buy real assets or FX, given the current and expected inflation rates,” the Goldman analysts said, rather than hold more lira, as the government wants them to do. “Thus, we think that this measure is unlikely to structurally stabilise inflation or the exchange rate,” they added.

Root causes ‘not addressed’

Piotr Matys, an analyst at InTouch Capital, which provides market information to institutions, similarly stressed that the root causes of Turkey’s currency crisis were going unaddressed.

Erdogan’s announced measures “have not addressed the underlying issues that underpin the bullish bias in USDTRY [dollar to lira],” Matys told CNBC. “Interest rates are too low with inflation well above 20% and set to accelerate further in the coming months after the lira plunged.”

Turkey’s government is “clearly determined to stay on course set by President Erdogan who insists that Turkey must change its economic model by lowering interest rates significantly to reduce its reliance on foreign capital,” Mayts said. He added that a key question is “whether Turkish households have sufficient trust in the administration that they will be compensated for potential losses if they switch their savings from dollars into liras.”

Moreover, financial compensation for potential losses from the Turkish treasury or central bank are likely to be very costly. “This is a credit negative development as it puts additional FX risk on the public sector balance sheet,” the analysts at Goldman Sachs wrote.

“As long as the administration continues to implement Erdonomics,” Mayts said, “sustainable reversal in USDTRY is unlikely.”

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Business

Turkish lira plummets to historic low after Erdogan sparks selloff

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Turkish President Recep Tayyip Erdogan attends a news conference in Budapest, Hungary, November 7, 2019.

Bernadett Szabo | Reuters

Turkey’s lira dropped to another record low of 12.49 to the dollar on Tuesday, a level once unfathomable and well past what was just last week deemed the “psychological” barrier of 11 to the dollar.

“Insane where the lira is, but it’s a reflection of the insane monetary policy settings Turkey is currently operating under,” Tim Ash, senior emerging markets strategist at Bluebay Asset Management, said in a note in response to the news.

The lira was trading at 12.168 to the greenback at 1 p.m. local time on Tuesday. 

The sell-off was triggered after Turkish President Recep Tayyip Erdogan defended his central bank’s continued contentious interest rate cuts amid rising double-digit inflation. He labeled the move as part of an “economic war of independence,” rejecting calls from investors and analysts to change course. 

Inflation in Turkey is now near 20%, meaning basic goods for Turks — a population of roughly 85 million — have soared in price and their local currency salaries are severely devalued. The lira has lost nearly 40% of its value this year and 20% since the start of last week alone, according to Reuters.  

For perspective, at this time in 2019, the lira was trading at roughly 5.6 to the dollar. And that was already making news, as it was a dramatic drop in value from the mid-2017 level of 3.5 to the dollar.  

‘Irrational experiment’

Turkey’s currency has been in a downward slide since early 2018, thanks to a combination of geopolitical tensions with the West, current account deficits, shrinking currency reserves, and mounting debt — but most importantly, a refusal to raise interest rates to cool inflation.   

Erdogan has long described interest rates as “the enemy,” rejecting economic orthodoxy to insist that raising rates actually worsens inflation, rather than the other way around.

Investors fear the lack of independence of Turkey’s central bank, whose monetary policies are seen as being largely controlled by Erdogan. He has fired three central bank chiefs in roughly two years over policy differences.

Semih Tumen, a former central bank deputy governor who Erdogan dismissed in October, sharply criticized the president’s moves.

“We need to abandon this irrational experiment, which has no chance of success, and return to quality policies that will protect the value of the Turkish lira and protect the welfare of the Turkish people,” Tumen wrote on Twitter, according to a translation.

The latest sharp downturn began last Thursday when the central bank cut rates by 100 basis points to 15%. It’s cut rates by 400 basis points since September alone.  

According to ratings agency Fitch, in August 57% of Turkey’s central government debt was foreign currency linked or denominated, meaning paying that debt becomes more painful as the lira continues to drop in value. 

“We are seeing a perverse economic experiment of what happens when a central bank has effectively no monetary policy,” Ash said.

“Erdogan has taken away the ability of the CBRT (Central Bank of Turkey) to hike policy rates.”

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Business

Asian markets fall as Fed signals ‘downshift’ in economy

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Shares fell in Asia on Thursday after further losses on Wall Street following a Federal Reserve report showing U.S. economic activity slowed this summer.

The report pointed to resurgent coronavirus cases and mounting supply chain problems and labor shortages — woes affecting many economies. Benchmarks fell in Tokyo, Hong Kong, Shanghai and Sydney.

Japan extended its emergency measures to combat COVID-19 outbreaks until the end of September, as numbers of new cases have been declining only slowly, straining the healthcare system.

Chinese markets have been chilled by further moves by the government to strengthen controls over online businesses that thrived during the pandemic.

In another development, ratings agencies say Evergrande Group, one of China’s biggest real estate developers, looks increasingly likely to default on its debts following news reports it will delay interest payments on bank loans. The company is selling assets to raise cash and faces complaints it is late in paying contractors and in delivering projects to customers.

Ratings agencies Moody’s and Fitch cut their ratings on Evergrande debt this week to a level that indicates they believe the company is likely to default on bond payments due to lack of cash. Chinese authorities are trying to reduce high debt levels in the economy and have urged Evergrande to resolve its more than $300 billion in debt, but financial analysts to suggest they might allow a default while trying to reduce its impact on the financial system.

Tokyo’s Nikkei 225
NIK,
-0.57%
fell 0.5%. In Hong Kong, the Hang Seng
HSI,
-1.95%
lost 1.2%, while the Shanghai Composite index
SHCOMP,
+0.21%
edged 0.1% lower. In Sydney, the S&P/ASX 200
XJO,
-1.90%
declined 1.2%, and the Kospi
180721,
-1.41%
in Seoul slid 0.9%. Shares fell in Taiwan
Y9999,
+0.20%
but rose in Singapore
STI,
+0.18%,
Malaysia
FBMKLCI,
-0.83%
and Indonesia
JAKIDX,
-0.24%.

The yield on the 10-year Treasury note fell to 1.33% after rising sharply on Tuesday to 1.37%.

The Federal Reserve’s latest survey of the nation’s business conditions, dubbed the “Beige Book,” said U.S. economic activity “downshifted” in July and August.

The Fed said the slowdown was largely attributable to a pullback in dining out, travel and tourism in most parts of the country, reflecting concerns about the spread of the highly contagious delta variant.

The S&P 500
SPX,
-0.13%
fell 5.96 points to 4,514.07, which is 0.5% below the all-time high the index set last Thursday. The Dow Jones Industrial Average
DJIA,
-0.20%
fell 0.2%, to 35,031.07, and the Nasdaq composite
COMP,
-0.57%
slid 0.6% to 2,249.73. The tech-heavy index’s decline ended a four-day winning streak.

Investors could be in for a choppy market through September as they monitor the Federal Reserve and Washington, which has to deal with budget reconciliation, infrastructure spending and the debt ceiling.

On the bright side, U.S. employers posted record job openings for the second consecutive month in July, according to the Labor Department. The disconnect between the growing number of job openings and the weak recovery for employment levels suggests the jobs issue could be crimping the broader economic recovery.

In other trading, benchmark U.S. crude oil
CLV21,
+0.20%
rose 5 cents to $68.35 per barrel in electronic trading on the New York Mercantile Exchange. It gained 95 cents on Wednesday, to $69.30 per barrel.

Brent crude
BRNX21,
+0.33%,
the international benchmark for pricing, picked up 9 cents to $72.69 per barrel.

The U.S. dollar
USDJPY,
-0.17%
slipped to 110.16 Japanese yen from 110.25 yen.

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Business

Asian markets decline ahead of Fed comments

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TOKYO — Asian shares were lower Wednesday as world markets cautiously awaited the U.S. central bank’s latest comments on the economic outlook.

Japan’s benchmark Nikkei 225
NIK,
-0.02%
gave up early gains and slid 0.2% while South Korea’s Kospi
180721,
-0.64%
retreated 1%. Australia’s S&P/ASX 200
XJO,
-0.47%
dipped 0.7%. Hong Kong’s Hang Seng
HSI,
+0.03%
declined 0.2%, while the Shanghai Composite
SHCOMP,
-0.03%
fell 0.4%. Benchmark indexes in Singapore
STI,
+0.22%,
Taiwan
Y9999,
-0.60%
and Indonesia
JAKIDX,
-0.50%
slipped as well.

Investors are awaiting the Federal Reserve’s latest economic and interest rate projections, expected later in the day. Economists expect Fed Chair Jerome Powell will try to convince jittery financial markets that the central bank can continue providing support without igniting higher inflation.

Those worries have recently pushed bond yields higher, sapping buying demand for shares.

The Fed meeting “carries the potential to either allay or heighten some of the market’s recent concern with regard to the soaring bond yields,” said Jingyi Pan, senior market strategist at IG in Singapore.

Wall Street capped a choppy day of trading with indexes closing mostly lower. Losses by banks, industrial stocks and companies that rely on consumer spending, including cruise line operators, outweighed gains by Big Tech and communication services stocks.

The S&P 500
SPX,
-0.16%
dropped 0.2% to 3,962.71. The Dow Jones Industrial Average
DJIA,
-0.39%
lost 0.4% to 32,825.95. The Nasdaq
COMP,
+0.09%
bucked the trend, benefiting from the rally in technology stocks and rising 0.1%, to 13,471.57.

Investors weighed new economic data Tuesday that showed Americans cut back on spending last month, partly due to bad weather in wide parts of the country that kept shoppers away from stores, and partly due to December and January stimulus payments running out.

“We’re still in the midst of getting back to a more normal environment,” said Jason Pride, chief investment officer of private wealth at Glenmede. “Given the lumpiness of government stimulus payments, we’re going to see numbers jumping around.”

In energy trading, U.S. benchmark crude
CLJ21,
+0.63%
fell 9 cents to $64.71 a barrel in electronic trading on the New York Mercantile Exchange. It lost 59 cents to $64.80 on Tuesday. Brent crude
BRNK21,
+0.54%,
the international standard, lost 15 cents to $68.24 a barrel.

In currency trading, the U.S. dollar
USDJPY,
+0.14%
rose to 109.12 Japanese yen from 108.99 yen.

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Business

Asian markets retreat as caution sets in

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TOKYO — Asian shares mostly fell Thursday as caution set in over company earnings reports, recent choppy trading in technology stocks and prospects for more economic stimulus for a world battling a pandemic.

Japan’s Nikkei 225
NIK,
-1.03%
slipped 0.5% in early trading, while South Korea’s Kospi
180721,
-1.90%
dropped 1.6%. Australia’s S&P/ASX 200
XJO,
-0.87%
slipped 0.6%. Hong Kong’s Hang Seng
HSI,
-1.35%
lost 1.2%, while the Shanghai Composite
SHCOMP,
-1.38%
was down 1%. Stocks rose in Indonesia
JAKIDX,
+0.63%
and Malaysia
FBMKLCI,
-0.25%
but fell in Singapore
STI,
-1.29%
and Taiwan
Y9999,
-0.43%.

Also on market players’ minds is the global vaccine rollout, which is becoming more organized in the U.S., but yet to play out in much of Asia, except for China, where the pandemic started.

“As the rally waned for the U.S. market, Asia markets can be seen left to their own devices into the Thursday session, and it appears that investors may be locking in some of the recent gains,” said Jingyi Pan, a senior market strategist for IG in Singapore.

Wall Street ended with modest gains, with the S&P 500
SPX,
+0.10%
inched up 3.86 points, or 0.1%, to 3,830.17, after swinging between a gain of 0.6% and a loss of 0.3%. The tiny gain extended the benchmark index’s winning streak to a third day.

The Dow Jones Industrial Average
DJIA,
+0.12%
gained 36.12 points, or 0.1%, to 30,723.60. The tech-heavy Nasdaq
COMP,
-0.02%
slipped 2.23 points, or less than 0.1%, to 13,610.54. The index had briefly been above its all-time high set last week.

Energy, communications and financial stocks helped lift the market. Those gains were primarily kept in check by declines in companies that rely on consumer spending and technology stocks.

GameStop and other recently high-flying stocks notched modest gains Wednesday. GameStop
GME,
+2.68%
rose 2.7% and AMC
AMC,
+14.71%
climbed 14.7%. The stocks have been caught up in a speculative frenzy by traders in online forums who seek to inflict damage on Wall Street hedge funds that have bet the stocks would fall. GameStop plunged 60% on Tuesday, and AMC Entertainment lost 41.2%.

“There’s a tug of war that’s been brewing for a week or so now, that markets are ripe for a correction and whether the events of last week are a precipitating event,” said Jamie Cox, managing partner at Harris Financial Group.

Stocks have been mostly rallying this week, an encouraging start to February after a late fade in January as volatility spiked amid worries about the timing and scope of another round of stimulus spending by the Biden administration, unease over the effectiveness of the government’s coronavirus vaccine distribution and turbulent swings in GameStop and other stocks hyped on social media.

That volatility has subsided this week, with Wall Street focusing mainly on corporate earnings reports while it keeps an eye on Washington for signs of progress on a new aid package.

Democrats and Republicans remain far apart on support for President Joe Biden’s $1.9 trillion stimulus package, but investors are betting that the administration will opt for a reconciliation process to get the legislation through Congress.

In energy trading, benchmark U.S. crude
CLH21,
+0.63%
gained 15 cents to %55.84 a barrel. Brent crude
BRNJ21,
+0.51%,
the international standard, added 6 cents to $58.52 a barrel.

In currency trading, the U.S. dollar
USDJPY,
+0.13%
inched down to 105.02 Japanese yen from 105.06 yen.

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