Financial crisis ahead? Here’s how global stock market turmoil affected Türkiye

Recession concerns in the United States, anticipation of early interest rate cuts, and escalating tensions in the Middle East contributed to significant stock market declines last week. How did all of these affect Türkiye, and are markets headed for another financial crisis?

On Monday, markets faced their initial negative news from Japan, with the day’s events echoing the 1987 Black Monday crisis, prompting speculation about the possibility of a second Black Monday.

The employment figures released in the United States on Friday created a major market shock on Monday. July’s job increase was anticipated to be 175,000, but it only reached 114,000.

This shortfall sparked worries about economic stagnation, further intensified by the recent Middle Eastern developments.

Japan’s stock market experienced its worst day in 37 years, with the Nikkei 225 index dropping by 12.4% and losses of 21.2% over the last two trading days.

Compared to the record high on July 11, the decline has now reached 34.9%.

The downturn that began in Japan has had repercussions across global stock markets, including China, India, Türkiye and Europe, with pre-market futures in the U.S. also seeing sharp declines.

Cryptocurrencies, on the other hand, were not spared from the declines, with Bitcoin and Ethereum both losing nearly 15%. Bitcoin dropped below $50,000 for the first time since February.

What triggered situation in Japan?

Japanese yen has been one of the major currencies with the lowest interest rates, making yen borrowing for investing in riskier assets, known as “carry trades,” common.

Experts suggest that the Bank of Japan’s (BOJ) interest rate hikes and indications of further increases, combined with rising U.S. recession fears and expectations for larger interest rate cuts, have compelled investors who borrowed yen and invested in riskier assets to implement “stop-loss” strategies.

In the U.S., especially among major tech stocks, a correction period has commenced, with growing recession fears and Japan’s actions exacerbating losses.

Meanwhile, the dollar fell over 2.4% against the yen on Monday, marking its worst session since late 2022.

What transpired at Borsa Istanbul?

The global market losses also impacted Türkiye significantly. Borsa Istanbul opened with a 6.72% loss and the index hit circuit breakers before trading commenced, with the decline reaching 7%.

Following sharp losses, the index triggered circuit breakers twice.

The U.S. dollar/Turkish lira exchange rate peaked at ₺33.3754, and the Euro/Turkish lira rate reached a new high of ₺36.6497.

The ramifications of these global crises on Türkiye have been a topic of debate.

Economy Minister Mehmet Simsek mentioned in a TV program that these events might have a positive effect on Türkiye.

“A slowdown in global growth negatively impacts risk appetite and us, but it also results in lower oil and commodity prices. Indeed, oil prices have decreased. Thus, falling oil prices positively affect the Turkish economy through the current account deficit and inflation. If the drop in global commodity prices, especially oil and natural gas, is sustained, it will benefit the Turkish economy as a net importer,” he explained.

Simsek added markets are expecting the U.S. Federal Reserve to implement more aggressive and rapid rate cuts, which are already being priced in.

“Given these developments, a relaxation of global financial conditions is advantageous for developing countries like Türkiye,” he noted.

“It can influence fund flows. Although risk appetite diminishes because of low growth, the easing of financial conditions still works in our favor. Another key point is that we do not have excessive foreign positions. There has been substantial capital inflow over the past year, but the concentration risk is lower compared to the past and other nations,” Simsek added.

Simsek commented on the uncertainty regarding the impact of such turmoil on Türkiye, stating: “We have a story – one of disinflation and structural transformation. Countries with a narrative are generally less impacted by such adverse conditions. Thus, factors such as a relatively low foreign position, a compelling story, the positive impact of falling oil prices, and favorable global financial conditions mitigate the effects of such turmoil on Türkiye.”

Nevertheless, experts caution that the risks for Türkiye might be more enduring.

If the country’s economic stability relies on high interest rates and no additional policy measures are implemented, such crises are likely to have a more severe and lasting impact.