Turkish Crisis – Stocks Selloff On Monday

Although I mentioned in a previous article emerging market weakness could be a catalyst which helps cause the American economy to decelerate in 2019, I think the Turkish crisis is being used as an excuse for an overbought market to selloff. The S&P 500 declined 0.4% and the Russell 2000 was down 0.68% on Monday.

The VIX was up 12.31% to 14.78. Volatility has re-appeared as the market exited the 2017-like trance where stocks levitated higher with no hiccups. The CNN Fear and Greed index has fallen from greedy to neutral as it is at 55 out of 100.

This wasn’t the only model which showed stocks were overbought. As you can see from the chart below, the Citigroup Market Sentiment Index tagged euphoria two weeks ago. At the peak, I expected a 3% pullback. The market is down 1.3% since then. As I mentioned previously, the further the market falls, the more it will look like this was a failed attempt at reaching the record high.

There was no economic data reported on Monday and few earnings reports. Previously, I mentioned this dearth of information would be good for stocks, but now it looks bad because the Turkish events are the only thing making headlines.

In this Turkish decline, the energy sector was the hardest hit as it was down 1.22%. Oil fell 43 cents to $67.20 on worries about demand as the tariffs threaten to slow the economy. Utilities were the best performing as they were up 9 basis points in a slight flight to safety trade.

Turkish Crisis – Lira Crashes

To be clear, the Turkish crisis is small part of the global economy. It’s so small at only 12 of the MCSI All World Index’s 1,426 holdings are from Turkey. They only make up 5 basis points of the index. The Turkish lira fell to an all-time low of $7.24 versus the dollar; it closed at $6.99.

As you can see from the chart below, the Turkish Lira is down 44.5% year to date, making it one of the worst performing currencies in the world. The Venezuelan economy, which experienced hyper inflation and an economic collapse, has seen its bolivar fall 97.3% versus the dollar. The Turkish ETF fell 11% on Monday and the Vanguard ETF for emerging markets fell 1.61%.