In an effort to take control of a collapsing currency – note that the lira fell over 50 percent versus the US dollar – the central bank raised interest rates by 6 percent to 24 percent. While inflation is rocketing and the currency is collapsing the Turkish government, like many other emerging market countries, is trying to prevent more shocks. President Recap Tayyip Erdogan had some negative comments about the bank, calling it “a tool of exploitation” as it raised rates more aggressively than anticipated by analysts. While some may question this comment it does indicate that the central bank does have its own agenda and is not under the thumb of the Turkish leader.
Indonesia, Brazil, Argentina (getting support from the IMF) and other emerging market economies have seen their currencies collapse and are concerned about prices. Iran, a country that has a ruling elite that is gifted at keeping order, has seen some social unrest in smaller towns and villages. Some Iranian citizens have been vocal about their leadership, saying that they cannot be trusted. Many have had trouble keeping up with the cost of household goods. The situation in Venezuela is even worse as the imploding economy and massive inflation, at 80,000 percent, has torn the country apart.
We still feel there is a risk of contagion, especially given that the US-China trade war will now heat up and the added risk to global equity is rather high. We see more analysts on Wall Street pointing to the seasonal September sell-off, EM and trade tensions that make a perfect storm.