Black Monday: Why a Chinese meltdown could signal a global crisis
A global meltdown in financial markets around the world persisted Monday as China continued to worry investors. A recent slowdown in China has sparked a global selloff setting global financial markets back several years, in some cases nearly a decade. The benchmark Shanghai composite index is down nearly 40 percent from its peak only two months ago. Asian financial markets across the board are down double digits as they fear a global slump in demand will hurt their export-focused economies. Turkey's exports to China constitute less than 1 percent of its gross domestic product (GDP) and a fraction of its global exports, making it the least susceptible to the financial contagion among emerging markets according to the International Monetary Fund (IMF) and World Trade Organization (WTO).
The United States' major equity indexes have lost more than 10 percent of their value in the last two weeks as American investors fear the China selloff will cripple the global economy. China's importance to global markets is not that it is the most populous country or even that its economy is on track to surpass the United States, its strategic significance is that it has taken the role of being the world's factory. It imports more raw materials than any other country, consuming the largest share of most commodities used in manufacturing. A slowdown in its economy would mean falling commodity prices as a result of depressed demand for the final goods that use those commodities as inputs.
The silver lining for Turkey so far has been that its biggest trading partner, the European Union, may benefit indirectly from China's woes. The China crisis will most likely lead the U.S. Federal Reserve to postpone any rate increases until the end of the year or even later - as I had predicted in April of this year - and thus cause the euro to appreciate even more than it already has. This will allow the eurozone to continue to buy its dollar-denominated inputs for its manufacturing sector more cheaply and drop prices where necessary to accommodate emerging markets who have suffered because of the global slowdown. Turkey and its euro-heavy export sector will be better off because of the appreciation in the euro, especially since the Turkish lira had not depreciated against the euro on major euro weakness, but has dropped nearly 10 percent in the last few weeks alone.
Crude oil is also at six-year lows on depressed demand from China and elsewhere, and is slated to continue to drop. Kadri Kaleli of Bayegan, a Turkish petroleum trading firm, in response to these multi-year lows, predicts even lower levels in the near future. "West Texas Intermediate crude will continue to fall from its current level of $39 to below $30 in the near term. This will be great news for Turkey and the global economy as the last time oil was this depressed following the Gulf War, a global economic expansion pushed global equity markets on one of the longest stock market drives in history. This led to budget surpluses during the Clinton presidency." Asked why he sees a continuation of the slide in crude prices, Kaleli attributed it to the massive supply glut.
The supply glut in crude markets may even grow larger as the Iran nuclear deal, all but signed, will bring more Persian crude onto global markets and push prices even lower. With some of the highest gas prices in the world, Turkish manufacturers will benefit from a long period of depressed crude oil prices.
Turkey's current war with the Islamic State of Iraq and al-Sham (ISIS) in the south and the PKK (a separatist terrorist organization) in the southeast coupled with gridlock in Parliament has entered the country into a perfect storm of uncertainty and apprehension. With newly called elections to be held in two months' time, this period may be short-lived, as the winner of the last election held two months ago, the Justice and Development Party (AK Party), may be on track to garner a majority of seats in the national legislature, freeing the country from weeks of deadlocked coalition negotiations. In the event the AK Party pulls off a victory, Turkey would need to take advantage of lowered energy costs while it looks to end armed conflicts and develop a strong domestic economy.
As the dust settles from this, the latest global financial crisis, look for Turkey to take advantage of lower commodity prices in weathering out this period of global uncertainty.
The United States' major equity indexes have lost more than 10 percent of their value in the last two weeks as American investors fear the China selloff will cripple the global economy. China's importance to global markets is not that it is the most populous country or even that its economy is on track to surpass the United States, its strategic significance is that it has taken the role of being the world's factory. It imports more raw materials than any other country, consuming the largest share of most commodities used in manufacturing. A slowdown in its economy would mean falling commodity prices as a result of depressed demand for the final goods that use those commodities as inputs.
The silver lining for Turkey so far has been that its biggest trading partner, the European Union, may benefit indirectly from China's woes. The China crisis will most likely lead the U.S. Federal Reserve to postpone any rate increases until the end of the year or even later - as I had predicted in April of this year - and thus cause the euro to appreciate even more than it already has. This will allow the eurozone to continue to buy its dollar-denominated inputs for its manufacturing sector more cheaply and drop prices where necessary to accommodate emerging markets who have suffered because of the global slowdown. Turkey and its euro-heavy export sector will be better off because of the appreciation in the euro, especially since the Turkish lira had not depreciated against the euro on major euro weakness, but has dropped nearly 10 percent in the last few weeks alone.
Crude oil is also at six-year lows on depressed demand from China and elsewhere, and is slated to continue to drop. Kadri Kaleli of Bayegan, a Turkish petroleum trading firm, in response to these multi-year lows, predicts even lower levels in the near future. "West Texas Intermediate crude will continue to fall from its current level of $39 to below $30 in the near term. This will be great news for Turkey and the global economy as the last time oil was this depressed following the Gulf War, a global economic expansion pushed global equity markets on one of the longest stock market drives in history. This led to budget surpluses during the Clinton presidency." Asked why he sees a continuation of the slide in crude prices, Kaleli attributed it to the massive supply glut.
The supply glut in crude markets may even grow larger as the Iran nuclear deal, all but signed, will bring more Persian crude onto global markets and push prices even lower. With some of the highest gas prices in the world, Turkish manufacturers will benefit from a long period of depressed crude oil prices.
Turkey's current war with the Islamic State of Iraq and al-Sham (ISIS) in the south and the PKK (a separatist terrorist organization) in the southeast coupled with gridlock in Parliament has entered the country into a perfect storm of uncertainty and apprehension. With newly called elections to be held in two months' time, this period may be short-lived, as the winner of the last election held two months ago, the Justice and Development Party (AK Party), may be on track to garner a majority of seats in the national legislature, freeing the country from weeks of deadlocked coalition negotiations. In the event the AK Party pulls off a victory, Turkey would need to take advantage of lowered energy costs while it looks to end armed conflicts and develop a strong domestic economy.
As the dust settles from this, the latest global financial crisis, look for Turkey to take advantage of lower commodity prices in weathering out this period of global uncertainty.
Last Update: August 25, 2015 02:03