Financial Review

Catch a Falling Star

…Turkey v. US. Turkey stumbles, raising contagion concerns. CPI inflation picks up, wages stagnate. US deficit balloons. Puerto Rico death toll much higher than reported. California wildfires worst ever. Catch a falling star.

Financial Review by Sinclair Noe for 08-10-2018

DOW – 196 = 25,313
SPX – 20 = 2833
NAS – 52 = 7839
RUT – 4 = 1686
10 Y – .08 = 2.85%
OIL + .96 = 67.77
GOLD – .70 = 1212.40


Equity markets were slapped hard today, and it was even worse for emerging markets. The Dow Industrials wiped out gains for August. The Nasdaq Comp snapped an 8-day winning streak. Investors dumped stocks in favor of safe-haven Treasuries, pushing bond yields much lower and pushing the dollar higher.


The United States and Turkey, both NATO members, are at odds on a range of issues – how to fight the Islamic State group, Ankara’s plans to buy Russian missile defense systems and how to punish the alleged plotters of a failed coup in Turkey in 2016. Most recently, Trump issued sanctions on top Turkish officials over the ongoing detention of a US pastor who is facing terror and espionage charges in Turkey. Today, the Turkish lira crashed 20% against the dollar. It had already fallen more than 40% in the past year. In a televised speech, President Erdogan called on citizens to exchange foreign currency and gold for lira, calling it an “economic war”. After he spoke, Trump tweeted that aluminum tariffs “with respect to Turkey” would be raised to 20% and steel to 50%. In addition, Turkish politicians are furious at American military support for Kurdish militia fighting ISIS in northern Syria. Then there is the Incirlik Air Base, which NATO has used extensively in the fight against ISIS. There has been some domestic pressure on Erdogan to close the base, and last week a group of pro-government Turkish lawyers filed charges against US soldiers stationed there.  Also, Trump’s rejection of the Iran nuclear deal has also been a point of contention between the two nations. Half of Turkey’s oil imports come from Iran. So the re-imposition of US sanctions against Iran has been seen by economists as likely to harm the Turkish economy. The dispute could have broader implications for geopolitics and the situation in Syria and the Middle East if Turkey moves closer to Russia as a result.


The economic breakdown in Turkey really should not affect US markets; Turkey is not a major trade partner, but these things have a way of turning contagious. Inflation in Turkey reached an annual rate of 15.9% in July – more than five times the average rate for wealthy nations – and government borrowing in foreign currencies has risen dangerously high. Investors are worried that Turkish companies that borrowed heavily to profit from a construction boom may struggle to repay loans in dollars and euros, as the weakened lira means there is now more to pay back. Shares in European banks with sizeable operations in Turkey fell, including Spain’s BBVA, Italy’s Unicredit and France’s BNP Paribas. The BIS cross-border figures also show that Japanese banks are owed $14 billion, U.K. lenders $19.2 billion and the United States about $18 billion. Turkey has led the pack of countries that maintain a high dollar-denominated debt burden. Argentina can also be counted among that contingent of troubled emerging-market economies. The European Central Bank has grown increasingly concerned about Turkey’s condition and a potential contagion. European stocks closed lower today.


The consumer-price index, or CPI, rose 0.2 percent from June after a 0.1 percent month-on-month gain the prior month. The overall CPI gauge rose 2.9 percent in the 12 months through July. Excluding food and energy, the core gauge was also up 0.2 percent. The core measure on a year-over-year basis advanced 2.4 percent, the biggest jump in that measure since September 2008. Energy prices fell 0.5 percent from previous month; food costs rose 0.1 percent. Costs for new vehicles gained 0.3 percent; used-vehicle prices rose 1.3 percent. Some items that posted big declines in June reversed course in July. Among them were hotel and motel rates, which rose 0.4 percent after a record decline of 4.1 percent in June. Airfares jumped 2.7 percent, the most since July 2013, following a 0.9 percent drop in June. Apparel decreased again, dropping 0.3 percent after falling 0.9 percent the prior month. The Fed’s preferred gauge of inflation – the PCE,  a consumption-based figure that tends to run slightly below the Labor Department’s CPI — has been at or above the central bank’s 2 percent goal since March, though the related core index was still shy of the target.


Inflation is bad news for workers. Hourly and weekly earnings languished when factoring in the rise in cost of living. Average weekly earnings actually decreased 0.2 percent over the one-month period and increased only fractionally from the same period a year ago. Average hourly earnings were unchanged over the month and actually two cents lower than July 2017.

The federal government racked up a $76.9 billion deficit in July, with increased government spending and tax cuts keeping the country on track to record its biggest annual deficit in six years. The Treasury Department reported that in the first 10 months of this budget year, the deficit totaled $684 billion, up 20.8 percent from the same period last year. Revenues are up only 1 percent this year, the increase held back by a big drop in corporate tax payments. Spending is up 4.4 percent, reflecting a big boost Congress approved earlier this year for domestic and military programs and the rising costs of financing the debt. The $76.9 billion deficit for the month of July compared to a deficit of $42.9 billion in July 2017. For the current budget year, which ends Sept. 30, the administration is now projecting a deficit of $890 billion. That would be up 33.7 percent from last year’s deficit. The administration’s July estimates project that the deficit will top $1 trillion in 2019, climbing to $1.1 trillion that year, and remaining above $1 trillion for three years.


Microchip Technology shares fell 11 percent after disappointing second-quarter revenue forecast.


In the week ahead, July retail sales data comes out Wednesday, which could be an important look at the direction of consumer spending at the start of the second half of the year. There are also some key earnings, including Macy’s on Wednesday and Walmart on Thursday. Deere reports Friday.


China also has key data, including retail sales and Industrial production Tuesday, which will be watched for any damage from trade wars with the U.S. but also for progress in China’s efforts to stimulate its economy.


The Puerto Rican government “quietly acknowledged” that Hurricane Maria killed 1,427 residents. The government had previously said only 64 people died in the storm’s aftermath. This is still a highly contested figure. A Harvard University study reports that anywhere from 800 to 8,500 people died as a result of Hurricane Maria. Though some were killed amid the destruction of Hurricane Maria, many were killed in the storm’s aftermath because of nonfunctioning hospitals and a lack of medical care. Resulting power outages also caused an increase in deaths due to diabetes, heart illnesses, and sepsis. The announcement came in a report detailing a $139 billion reconstruction plan needed to restore infrastructure across the entire island, which is home to 3.3 million US citizens. Hurricanes Maria and Irma caused countrywide blackouts that broke records as the largest power outages in American history. Blackouts continue to persist on the island, today.



The California wildfires are really bad, again. The Mendocino Complex Fire is the largest wildfire in the state’s history, with nearly 500 square miles burned. The Holy Fire has forced 20,000 people to leave their homes. Sixteen other blazes, requiring 14,000 firefighters, are devouring woodlands elsewhere in California. Some of the “smaller” fires this year would have once made history. The Carr Fire, a massive blaze that has killed eight people, is already the sixth-most destructive fire in the state’s history. There would be little precedent for this year’s fire season in California—if the last few years hadn’t been wretched as well. 2017 was the state’s costliest, most destructive wildfire season. Six of the 10 largest wildfires in the state’s history have occurred in the past decade, and all but one of them have happened this century. The factor that clearly made the difference in 2017, and again in 2018, is heat. July 2018 was the hottest month in California ever recorded. The state as a whole was 5 degrees Fahrenheit warmer than normal. Death Valley also endured the hottest month ever recorded on Earth, averaging 108.1 degrees Fahrenheit across day and night. Modern federal data, collected through satellite observation, show that wildfires now burn twice the area they did in the 1990s and ’80s.


Every year in August, the Swift-Tuttle comet puts on a brilliant show. When the Earth plows into its wake, tiny sand- and pea-size bits of debris hit our atmosphere at 132,000 miles per hour, reach temperatures of 3,000 to 10,000 degrees, and streak across the sky in what we call the Perseid meteor shower. This year, the meteor shower will peak between the night of Sunday, August 12, and the early morning hours of the 13th. You may be able to see around 60 meteors an hour during the peak. You can also catch glimpses of the Perseid meteors in the days leading up to the peak and should be able to see some in the sky until the last week of August. This weekend will also see a new moon, so the skies will be extra dark to spot the streaks of light across the sky. you should be able to spot the Perseids rising in the northeastern sky. It’s best to wait until 11 pm or later, when the constellation Perseus will be higher in the sky. And may all your wishes come true.

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