Global and domestic headlines are weighing on investors' minds as the aftermath of Turkey's attempted coup raises questions about EU political stability and the start of the Republican National Convention will bring Donald Trump's vision to prime time.
By Vikram Rangala
Monday, July 18, 2016
The European Union faces several challenges both political and economic, and the political challenges affect the economy because they affect the stability of the business environment. The ultimate cost (or benefit) of Brexit is still hard to predict. That unpredictability, more than any resentment, is why the EU governments are pushing Theresa May's new government to begin the Article 50 protocols ASAP and leave, already. They'd rather be 100% in the post-Brexit Europe than spend any more time in the current limbo.
So this weekend's attempted coup in Turkey, the EU's only Muslim-majority member, added another dose of doubt to an already murky situation. The coup plotters appear to have had no leader or clear plan. They underestimated the people's desire for democracy, even the repressive democracy of Recep Erdogan. And despite the recent attacks by Islamic State in Istanbul and Ankara, the will of religious conservatives was also against them, as mosques called on the people to go into the streets and resist the army takeover.
In short, an alliance of democrats, secularists, and religious conservatives rose up to defend a regime that may well crack down on both democracy and religion in the coup's aftermath. Erdogan tried to blame the coup on a Muslim cleric currently in exile in Pennsylvania, demanding and failing to get his extradition from the US. It appeared to be an attempt to punish a former ally who had turned against him, something the coup will now allow him to do more of. Thousands of political opponents, some of whom don't seem to have been involved, are under arrest.
With a democratically-elected autocrat restored to power, Turkey now faces a lira that has plummeted six percent and the possible flight of foreign capital from a country with one of the highest deficits in Europe. Stocks in Istanbul fell roughly five percent by Monday morning. Turkey's GDP has grown since the end of 2014, however, in part because of the boost in spending by millions of Syrian refugees. First quarter growth in 2016 was 4.8 percent.
Turkey offers opportunity for investors with an appetite for risk, but no easy lessons. The GDP is growing because of the refugee problem. Islamists and secularists are united in their support for democracy and for a president who seems to disdain it. It's as confusing as what's happening at the western end of the EU, in which the UK public used a close but democratic referendum to end its EU membership altogether.
Speaking of insurgencies, the Republican National Convention kicks off Monday in Cleveland with a nominee, Donald Trump, who will not receive the endorsements of either living Republican former president or the last two Republican nominees. Former Kansas senator Bob Dole, the 1996 nominee, is the only one supporting Trump. Such division is unusual for a US political party, to say the least, but it may in fact enhance Trump's outsider appeal and his message that the establishment is the problem.
In a campaign marked by surprises and chaos, the prospect of an unconventional convention is not surprising. Cleveland Police and other law enforcement worry about the dangers of large protests outside and #NeverTrump delegate opposition inside the convention hall, in a state where the open carry of firearms is legal. Meanwhile, the Trump campaign's chairman, Paul Manafort, who previously worked for dictators Ferdinand Marcos and Mobutu Sese Seko, among others, said that the protests would actually help the campaign's message of "law and order."
For investors, the prospect of unrest and violence at a political convention is tied to larger concerns about how the world perceives the stability of the United States and its ability to transfer power from one leader to the next. In the wake of the killing of police officers in Dallas and Baton Rouge, following the killing of civilians by police in Minnesota and Baton Rouge, the Cleveland Police Union went so far as to ask Gov. John Kasich, who will not be attending his party's convention, to declare a state of emergency and ban the open carrying of firearms during the convention. The governor was forced to admit that it is not in his power to do so.
Cleveland police said they have taken guidance from the attacks in Nice and elsewhere in their planning and that they are ready. The markets, like the world, will watch Cleveland hoping it will be just entertaining and not violent. If political violence can scare investors into leaving Turkey, it may well have a chilling effect on the world's largest economy as well.
The stock market is actually a great predictor of presidential elections. In 19 of the last 22 election cycles, the performance of the S&P 500 in the three months prior to the election has correctly predicted the winner. If the market went up between August 8 and November 8, the incumbent party retained the White House. If the market went down, the White House switched to the other party. It's a rare instance in which the market predicts the news as much as it reacts to it.
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