European Hot Bed | August 10, 2018

The European Union was a hot bed of risk last week. Are those risks poised to present a problem or opportunity?

Turkey has come into focus in the last week as they have been holding an American Pastor accused of being involved in an attempted coup. This has drawn the attention of the White House who has doubled the tariffs against steel and aluminum coming from Turkey in response. Turkey was already suffering a rout in its currency which is down 73% year to date. After the increased tariffs, the Lira was down an additional 18%.

Though not part of the EU risks, it is worth mentioning that China and the US are at it again with the final $16B in Tariffs on the original $50B promised going into effect last week for both sides. The increased posturing by both sides has caused a continued fall in the yuan. This marked the ninth straight week that the yuan has fallen against the dollar.

Italian bonds under performed in a market that was already taking a hit. As the Eurozone bonds fell due to Turkish uncertainty, Italy led the charge. They are the third largest economy in the EU and are discussing reforms that would be very costly and likely break with EU budget rules. While the newly formed government has stated that they are not interested in their own form of Brexit (I like to call Italeave), they appear to be setting themselves up for that very battle.

The UK continues to be a wild card in the EU as the chances of a ‘no deal’ Brexit have increased. A ‘no deal’ Brexit would mean that when the UK leaves the EU in March, that they would have no trade, employment, or business arrangements with the rest of the EU. Essentially, an excommunication from the block. This will force the hand of individual nations to negotiate deals with the UK; however, this will leave GDP to suffer as those deals are ironed out.

While these risks are real, the effect they are having on their nation’s currencies represent an opportunity for future growth. Should these countries see fit to get out of their own way, the fall in their currencies make them more competitive globally.

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