Turkey, trade worries hit Wall Street

(Reuters) – U.S. stock indexes fell sharply on Wednesday, hurt by concerns over a stronger dollar and Turkey’s currency crisis, as well as over the trade tensions with U.S. trading partners that have dominated the first half of 2018.

The dollar hit a fresh 13-month high before retreating, and MSCI’s widely tracked 24-country emerging market stocks index .MSCIEF entered a technical bear market.

COMMENTS:

WILLIE DELWICHE, INVESTMENT STRATEGIST AT BAIRD IN MILWAUKEE:

“Maybe lingering global uncertainty is a catalyst, but you also have beneath the surface things that are starting to roll over and fall apart a little bit.

“The S&P and the move higher yesterday didn’t go anywhere and so I think from a short-term perspective it left the market vulnerable to weakness this morning. Moving below 2820 on the S&P invited more short-term selling and it starts to build on itself. Since the U.S. market opened, I think what you’re seeing is more a flight to safety and a desire from investors to de-risk a bit.”

LOU BRIEN, MARKET STRATEGIST, DRW TRADING, NEW YORK

“It’s the chicken and egg problem, are the emerging markets and their currencies weak or is it the dollar that’s strong? Turkey is weak, that’s the spectacular one, but currencies across the board have moved since March. So have the rules of the game changed in the sense that it’s clear that the Trump administration was not afraid of having a trade war and they weren’t shy about using the dollar as a tool? The dollar has strengthened across the board since then, not just the emerging markets.”

“If there’s a new conception of the rules being changed, then we could see trade problems and dollar strength for a long while. That makes all this dollar denominated debt that’s built up over the last decade harder to finance. The stronger the dollar gets the more urgent are the dollar purchases.”

KEITH LERNER, CHIEF MARKET STRATEGIST, SUNTRUST ADVISORY SERVICES, ATLANTA

“Right now, the overall sentiment, especially toward emerging markets, is fragile, and then you have the strong dollar, which is adding to uncertainty. The main story today is the China market getting hit. China is really the gorilla of emerging markets; more than 30 percent is in China. Why China seems to be getting hit is apparently a freeze on gaming licenses, which is hitting technology.”

“Our position on emerging markets is neutral. The reason we’re not becoming more bearish: from the high made in January, emerging markets are down about 20 percent. Historically, the average drawdown in emerging markets is 21 percent per year. We’re close to that today already. Valuations are now at the cheapest they’ve been since 2016.”

“In the U.S., mainly what we’re seeing is a spillover effect from emerging markets. But taking that into context, small caps yesterday made an all-time high, and the S&P is about 2 percent below an all-time high. So in context, the market has had a really nice run since late June.”

“On the negative side, the U.S. dollar strength is just going to make it more difficult for emerging markets. Potentially down the road it could be an issue for multinationals in the U.S. The earnings story has been a big part of the bull market case. I don’t think we’re there yet, but the more (the dollar) goes up, the greater risk there is that it seeps into earnings.”

PETER CECCHINI, MANAGING DIRECTOR AND CHIEF MARKET STRATEGIST AT CANTOR FITZGERALD IN NEW YORK

“We’re in the midst of a change in the global rates regime. Developed market rates are going higher and emerging markets currency devaluations are something of a tremor, and we’re going to see more of bouts of unexplained volatility and that is part and parcel of repricing of global risk.”

“The changing rate backdrop will impact currencies, which in turn will impact inflation in emerging markets and the U.S., with stronger dollar impacting the ability of the U.S. companies to maintain profit margins.”

“In our view, the S&P will not make new highs for the year and the reason for that is around rates, dollar headwinds and instability in emerging markets.”

“What was interesting today was Tencent’s miss, you see how vulnerable some of these big global tech names are to a miss in earnings. Over time, the breadth of the market tends to narrow, you have smaller leadership groups and once they begin to rollover, which perhaps Tencent is telling us what is about to happen, that the broader markets have a more of a reason to selloff.”

OLIVER PURSCHE, CHIEF MARKET STRATEGIST OF BRUDERMAN BROTHERS IN NEW YORK

“I don’t think that investors should necessarily panic or fear that this is the end of the bull market and that a sharp or prolonged correction lies ahead. Let us not forget that July, August and early September tend to be seasonally weak for equities and we haven’t seen that weakness.

“The reality is the economy’s going strong but there is an increasing amount of yellow to orange flashing warning signs out there, specifically in the housing market which is a pretty big contributor. You have to look at things objectively and say things are going well but there are trouble signs.

“I think the dollar is strengthening as a result of diverging monetary policies. It’s fairly clear that the Fed is almost certain to hike in September and very likely to hike in December again, whereas other central banks are maintaining a status quo in terms of monetary policy. I think that explains the dollar rally. If you listen to the earnings conference calls, US-based multinationals have addressed that as a concern. Whereas obviously this is helping foreign-based multinationals.”

ALAN LANCZ, PRESIDENT, ALAN B. LANCZ & ASSOCIATES INC., AN INVESTMENT ADVISORY FIRM, BASED IN TOLEDO, OHIO:

    “What really accelerated this (stock) selloff was Tencent, the Asian leader as far as the Internet play in China. With them announcing poor earnings and growth, it was a shock to the system from the standpoint of we’re not seeing that with the U.S. companies. Since June that segment of the Asian market has been down almost 30 percent, so it’s not like today is the day, but this kind of pulls it to a culmination that, wow it’s even worse than we thought. That’s kind of what we’re seeing in combination with what everybody’s been talking about since Friday, with the tariffs and the rising dollar. It seems like nothing is getting settled and things are escalating.

    “If this escalates with the trade wars and with China slowing down, the bottom line is even U.S. investors are saying even though the U.S. economy looks good now and earnings are beating expectations, will it eventually filter down to the U.S. And the answer is yes.”

SAID HAIDAR, FOUNDER AND CHIEF INVESTMENT OFFICER, HAIDAR CAPITAL MANAGEMENT

“When the dollar turned in the second quarter we had a really weak EM market… You now have another huge selloff in EM, which has been exacerbated by Trump’s willingness to jam on more and more sanctions when countries are having trouble in the market – like adding to the sanctions on Turkey.”

FRITZ FOLTS, CHIEF INVESTMENT STRATEGIST, 3EDGE ASSET MANAGEMENT, BOSTON

“Emerging markets are attractive in a lot of ways, but you just can’t fight that U.S. dollar strength. That means that you can’t play in that game right now. We love emerging markets over the long term. The demographics are very attractive, and they are going to grow at a much greater clip. And that is all good, but there are just periods of time where you need to not be in them.

“There are a lot of people who went into emerging market equities in 2014 and 2015, because they were undervalued… but the catalyst wasn’t there, because this is another example of a period where the dollar was very strong, and getting stronger.

“Right now we’re in maybe a similar situation where the U.S. dollar is just putting so much pressure on emerging markets it makes it very, very difficult for them in this current situation.

“Divergent monetary policy is really putting a floor under the US dollar for now.”

JASON BROWNE, CHIEF INVESTMENT STRATEGIST AT FUNDX IN SAN FRANCISCO, CALIFORNIA.

“The real question that comes up is if this is a start of a bear market or is this another correction in normal volatility that we’re experiencing this year

    “Investors are worried if the markets have gotten ahead of themselves and therefore there is fear based and broad based selling, it’s not based on fundamentals, people are selling across the board.  

    “It’s better to invest in the U.S. vs. other countries and that has gotten more extreme lately.

    “People are looking at the dollar as a safe-haven and view the U.S. economy as strong and the overall potential of rates rising as a bit more diminished, people see parking money in the U.S. as less of a risk.”

Americas Economics and Markets Desk; +1-646 223-6300

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