Fall of the Turkish Lira raises concerns for emerging markets - WSJ

According to the Wall Street Journal, the fall in the TRY in the face of increased US tariffs on aluminum and steel raises uncertainty for investors in emerging markets.

Key quotes

"President Trump on Friday doubled steel tariffs on Turkey as its government battled the currency collapse. The decision marked a departure for the U.S., which has generally tried to calm global markets during times of financial turmoil in emerging markets, especially when investors are gripped by fear of contagion.

Mr. Trump raised tariffs on Turkish steel imports to 50% and aluminum to 20%. The decision deepened the lira’s drop and worsened market fears that the weaker currency could exacerbate fragilities in the economy, making it harder for the heavily indebted corporate sector to pay back domestic and foreign loans, putting strains on the country’s banks.

Countries like Turkey that are experiencing economic turmoil usually get sympathy from the rest of the world, said Torsten Sløk, chief international economist for Deutsche Bank. “It is rather unique with an emerging market which not only faces a domestic macroeconomic crisis but also an external political conflict with the main shareholder of the [International Monetary Fund],” he said.

Trump administration officials said the tariffs were intended to boost the domestic steel and aluminum industry. The moves followed a series of actions the administration has taken in recent weeks to step up economic pressure on President Recep Tayyip Erdogan of Turkey to release U.S. evangelical pastor Andrew Brunson, who has been detained in Turkey on espionage charges since October 2016.

In the event of contagion, Turkey’s economic misfortune would likely hit its closest neighbors who are most fragile first, some market analysts said. The impact has been felt in Argentina and Brazil, as well as Russia, added  Brad McMillan, chief investment officer for Commonwealth Financial Network, in a recent note to investors.

“President Trump’s refusal to accommodate Turkey is a remarkable departure from previous policy practices,” said Jack Ablin, chief investment officer at Cresset Wealth Advisors, who added that he would be gauging the extent of a spillover into other emerging markets and European banks.

Over three decades of periodic currency storms, such as the early 1990s Mexican peso plunge, and the Asian crisis a few years later, “the market’s underlying assumption was that the U.S. would try to be helpful” during periods of extreme foreign-exchange volatility, said Shahab Jalinoos, head of global currency strategy at Credit Suisse Group. “Now the market can no longer assume that.” "