Turkey dominated the headlines of the European financial press as I woke up this Friday morning in England. The Turkish lira is getting pounded, and now sits at or near a record low against the U.S. dollar.
Political tensions between Ankara and Washington over Turkey's continued detention of U.S. pastor Andrew Brunson have soured investor confidence on the Turkish economy, leading to what seems like a classic emerging-markets meltdown. That's characterized by capital outflows, rampant inflation and a central bank attempting to defend a currency with higher interest rates (which, from what I've seen, rarely works).
Making the Turkish central bank's job more difficult is the fact that Turkey's short-term rates are already among the world's highest, with the overnight lending rate at 19.25% as I write this. Hyperinflation is evident in the Turkish economy, with the government's most recent reading above 15%. That doesn't leave much wiggle room for the central bank to act -- hence the run on the lira.
As its largest city of Istanbul does, Turkey's economy straddles the line between Europe and Asia, so the risks of a Turkish meltdown aren't merely localized. Italian and Spanish banks in particular are coming under growing scrutiny for their Turkish loans, made through both cross-border lending and ownership stake in Turkish banks.
Shares of Italy's UniCredit -- viewed as sort of a proxy for Southern Europe's economic health -- are getting hammered Friday, threatening to retest their all-time lows of February 2017. Italian 10-year bond yields are also hitting 2.94% as I write this - their highest sustained rate in more than three years (excepting an early June "flash crash").
About the only direct Turkish exposure for U.S. investors here would be through Fiat Chrysler (FCAU) , which owns a 37.8% stake in Turkish automaker Tofas. FCAU is down some 3% at last check, and there's has been no good news coming out of the company since the recent death of late CEO Sergio Marchionne. Tofas isn't a significant part of Fiat's empire, but the automaker's stock is nonetheless down Friday and FCAU just isn't a safe place to be right now.
The question for U.S. investors here has to be: "Is a potential Turkish meltdown the event that will finally kill the longest U.S. bull market in memory?" That seems unlikely, but we've seen such "contagions" ripple across markets several times since the 2008-2009 financial crisis.
So, events in Turkey certainly bear watching. This contagion seems likely to impact stocks and bonds in emerging countries, so that's an area to reassess in your portfolio.
There are quite a few generic emerging-markets ETFs out there -- the Vanguard Emerging Markets Stock Index Fund (VWO) and the iShares MSCI Emerging Markets (EEM) are two of the biggest. If you own these or other emerging-markets fund in your 401(k) or elsewhere, you'd better make sure you want to hold them for the long-term ... because the short term could be ugly.