A sharp drop in the Turkish lira set off a global decline in stocks and a rush to sovereign bonds on Friday, pushing most of the major U.S. and European equity indexes into the red for the week.
In the U.S., all three major stock indexes lost about 0.7% on Friday but ended mixed for the week. The Dow lost 0.6% for the week while the S&P 500 fell 0.2%, but NASDAQ managed to hold onto a 0.3% gain. Smaller cap stocks also ended mixed for the week, with the S&P 600 small caps – which are less exposed to foreign markets – up 0.8% while the 400 midcaps lost 0.2%.
In developed markets, European stocks fared the worst on worries about the region’s banks’ exposure to Turkey. The Stoxx Europe 600 lost 0.8% for the week after falling more than 1% on Friday. The lira plunged more than 14% against the U.S. dollar on Friday and is down 45% over the past year, raising concerns about Turkey’s ability to repay its debt, much of which is owed to European banks. To further aggravate matters, President Trump slapped Turkish steel and aluminum imports with sharply higher tariffs. The euro dropped more than 1% against the dollar, falling to about $1.14, its lowest level in over a year. Chinese stocks avoided the debacle, with Asian markets having already closed for the week. Both Shanghai and Hong Kong stocks rose more than 2% for the week, earning back about half of the previous week’s big losses.
Developed world sovereign bonds benefited from Friday’s turmoil, led by U.S. Treasury securities. The benchmark T-note ended the week at 2.87%, down eight basis points on the week, while the 30-year bond closed at 3.03%, down six bps. Investors also plowed into German bunds, where the yield on the 10-year security dropped nine bps to 0.32%, and U.K. gilts, where the 10-year bond yield fell eight bps to 1.25%. Oil prices were also sharply higher on Friday although down more than 1% for the week.
Inflation reports for July dominated the thin slate of U.S. economic reports released during the week. Both the headline and core consumer price indexes rose a fairly modest 0.2% compared to the prior month but the year-on-year changes were fairly steep, with the headline number climbing 2.9% and the core rate – excluding food and energy prices – rising 2.4%, the biggest gain since the financial crisis. Producer prices told the same story. The headline index was unchanged from June, up 0.1% for the core, but up 3.3% and 2.7%, respectively, versus a year ago. These reports will likely validate the Federal Reserve’s intention to raise rates at its next meeting in late September and again in December. Nearly 90% of economists surveyed by the Wall Street Journal now expect that to happen, up from 84% in July.
Reports/dates/facts/links worth paying attention to over the next week:
1. August 15: Retail sales for July; industrial production for July; Empire State manufacturing survey for August; National Association of Home Builders housing market index for August.
2. August 16: Weekly unemployment claims; housing starts for July; Philadelphia Fed business outlook survey for August.
3. August 17: Leading economic indicators for July; University of Michigan consumer sentiment index for August, first reading