U.S. – Turkey Standoff

The standoff between Turkey and the United States, which in fact are two NATO allies (The North Atlantic Treaty Organization or NATO is an intergovernmental military alliance between 29 North American and European countries), continues to escalate and there are signs we could be heading to a breaking point.

On Tuesday, Turkish President Recep Tayyip Erdogan called for a boycott of U.S. electronics, including Apple iPhones, in retaliation for the Trump administration’s punitive actions over the past few weeks to pressure Turkey into releasing the American pastor Andrew Brunson. Brunson was arrested in October 2016 and accused of plotting to overthrow the Turkish government. Five months later he was formally indicted on espionage charges and accused of having links to terrorist organizations.

By the way, today, the 2nd Penal Court in İzmir rejected the appeal from Brunson to be released from house arrest during his trial, and sent the defendant's petition to an upper court.

President Erdogan has also signed a decree today raising the tariffs on U.S. rice to 50 percent, on cars to 120 percent, on alcoholic drinks to 140 percent, and on leaf tobacco to 60 percent. U.S. cosmetics are also on the list.

Explaining the new tariffs, Turkish Vice President Fuat Oktay said the raises were ordered "within the framework of reciprocity in retaliation for the conscious attacks on our economy by the U.S. administration."

The Turkish lira strengthened again by about 3 percent Wednesday during morning trading after an 8.4-percent gain Tuesday when the Banking Regulation and Supervision Agency halved the limit on lenders’ swap and swap-like transactions to 25 percent of shareholder equity.

Limits placed on funds’ access to lira liquidity in the offshore swap market makes it harder for them to borrow the Turkish lira and short it.

U.S. Economic Data

Today, we get from the U.S. Census Bureau the retail sales data of the month of July.

A turn lower for unit vehicle sales points to weakness for July's motor vehicle component, which in turn is expected to limit the headline gain for retail sales to a consensus 0.1 percent vs. 0.5 percent in June.

Excluding autos, a larger gain of 0.4 percent is the call with ex-auto ex-gas also at a consensus 0.4 percent and control group sales at an expected 0.4 percent as well.

Retail sales measure the total receipts at stores that sell merchandise and related services to final consumers.

A little bit later, we’ll also get the Federal Reserve’s Industrial Production and Capacity Utilization overview for the month of July (9:15 AM EDT).

Industrial production has been up and down in recent months on swings in the dominant component of manufacturing. Mining, a smaller component, has been consistently robust.

Consensus for industrial production is a 0.3 percent gain with manufacturing also seen rising 0.3 percent. The consensus for capacity utilization is 78.2 percent vs June's 78.0 percent.

Some Thoughts on the Global Markets

Long-term investors should better not overlook the fact that we remain in an environment of “thin summer trading," therefore caution should remain well in place.

That said, nobody can negate that the bull market in American stocks is only one week away from becoming the longest in history and that at a moment trade tensions between the U.S. and China, two of the world’s biggest economies, continue to linger on.

Besides all that, the U.S. dollar index (DXY) hit its highest level in the last 13 months while the euro traded at its lowest level in almost 14 months at $1.33 per euro.

By the way, Hong Kong was obliged to intervene to defend its peg to the U.S. dollar for the first time in three months after the local currency fell to the weak end of its trading band.

The yield on 10-year Treasuries declined two basis points to 2.88 percent.

The MSCI Emerging Market Index fell yesterday 1.1 percent, reaching the lowest level in 13 months while the MSCI All-Country World Index declined 0.3 percent.

Cupper also hit the low of the year.

Fact is, that markets have fixated almost exclusively on Turkey since August 10, when the Turkish President Erdogan declared his refusal to bow to U.S. political demands and market pressures. The ensuing turmoil has rippled across emerging markets, which has not been the case for the developed markets.

So, a legitimate question could be: “Where are we?”

In my view, I think the current upheaval is not over yet.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.