Money Advice

Wall Street nervous about international problems

Posted by The Simply Money Advisors Team on Aug 13, 2018 4:53:00 PM

International concerns weighed on U.S. markets last week, as Wall Street’s nerves were high due to Turkey’s currency plunging, ‘Brexit’ negotiations stalling, and the trade spat with China not letting up.

On Friday, the Turkish Lira dropped about 14%, partly due to President Trump saying the U.S. would double the tariffs (taxes) on Turkey because they are detaining a U.S. pastor. The reason Wall Street is nervous about the currency tumbling, which as of Monday morning is down about 45% for the year (according to Bloomberg), is that a weaker currency will make it more expensive for Turkey to repay its debt, and much of its debt is held by European banks.

While Brexit negotiations have not been fruitful, talks are scheduled to resume this week. There is an increasing concern there may be ‘hard’ exit, meaning the United Kingdom leaves the European Union (EU) without a deal in place.

The sticking points continue to be the Irish border (Ireland is part of the EU and Northern Ireland is part of the exiting UK), how UK and EU citizens will be treated by one another in terms of working and living arrangements, and how the UK and EU will trade with each other.

If there is no deal by next March, trade between the UK and EU will default to World Trade Organization rules. This would result in highly scrutinized custom checks at borders, causing a slowdown of goods entering and leaving the UK. It also means tariffs would increase for some products, such as farm exports, which would see tariffs of 30-40%.

The important upcoming events are the October EU summit, a possible emergency summit in November or December if no deal is in place, and the actual Brexit itself on March 29, 2019.

In the U.S., the economic data continues to be healthy with economists expecting the economy will grow around 3% in third quarter (July, August, September). This week’s most important economic release will be the report on retail sales, and this matters because consumer spending makes up about 70% of the U.S. economy.

Economists will also be paying attention to reports on manufacturing and housing. Meanwhile, U.S. companies have reported very strong earnings for the second quarter. Earnings are 26% higher (on average) compared to the same time last year due to robust sales and the corporate tax cut. Companies reporting earnings this week include Home Depot, Macy’s, and Walmart.

The Simply Money Point

Stocks have recovered most of their losses since January. Low recession risk and growing corporate earnings in the U.S. have been good news for investors over the past month and should be good news in the long term.

However, higher volatility is possible in the short term as Wall Street turns its attention from earnings to trade tensions with China, Brexit negotiations, and the possibility of less government stimulus depending on the results of the U.S. midterm elections.

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Topics: Economics, Investing

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