No Pardon for This Turkey

The Turkish crisis is only an extension of negative trends in place for many years. It is not the result of rising US interest rates -- the USD/lira carry trade has been a loser for many years. Turkey, like other emerging markets, is collateral damage in the US-China trade war in which longstanding instabilities are exacerbated by tariffs, sanctions and other pressure-tactics, including possible denial of an IMF bailout. The crisis makes Turkey a hostage in the trade war, whom Trump must be seen as being willing to shoot, lest he lose negotiating power with China. We doubt that a worst-case in Turkey is sufficient to trigger a global financial crisis. If Erdogan backs down and Trump reduces tariffs and rescinds sanctions, the shame for China to back down would be lessened, and Trump will have demonstrated that he will remove pressure once placated. We expect resolution before the US mid-terms, with the emerging markets the greatest beneficiaries of a global relief rally.