What's moving emerging markets

Turkey's economy hit a record low - with the rate now fluctuating around 6.50 lira per US dollar. A report published by the Institute of International Finance says that Turkey will suffer a credit crunch of the same scale it experienced in 2008.

Venezuela on the other hand has removed five zeroes from its currency and created a cryptocurrency tied to crude oil called "Petros" which the government is now obligating banks to use (along with Bolivars, the local currency) to perform all transactions with.

Are these the signs of an Emerging Markets Armageddon? Or is it just an example of two totalitarian systems buckling under the weight of economic mismanagement.

Factors

If you have been looking towards the east, then you are likely aware of Erdogan's consolidation of power- which includes appointing the Governor of Turkey's Central bank. A position which he filled with Berat Albayrak, his son-in-law that also took the reins of the newly created Ministry of Finance and Treasury.

Another economically hurtful perspective is Erdogan's insistence that the country's economics should be conducted in an Islamic way - which prohibits interest, a key policy used to fight runaway inflation.

Some even fear he will cut interest rates to fix inflation. Markets have been watching the country with apprehension since the referendum that gave the president power over the central bank. Foreign investors are worried that the Central Bank will not be able to work independently for the health of the country's economy.

Turkey will not pull-down others

Although the current situation in Turkey seems to reflect other crises that caused a domino effects like the 1997 Thai Bhat crisis the epicenter or origin of a pan-Asian financial meltdown of the 90s.

There are a few significant differences though, first, being gun shy from all of the crises of the last few decades, emerging markets have moved towards protecting their economies from other more vulnerable EM economies.

Second most EM economy try to preserve their debt in foreign currencies to around 35% to avoid instability in the case of a mass exit of foreign capital. The debt accrued by Turkey though is 70% foreign currency (primarily USD and EUR) - and with foreign investors becoming skittish and leaving the country - its economy is in serious trouble.

Skittish investors are normal

When the markets are moving erratically, investors obviously become more risk averse, which may temporarily pull down other emerging market economy's down. Once investors realize this as a buying opportunity, a correction is usually observed.

Of course, investors do their homework - they will independently assess emerging markets, their relative strength or weakness and level of risk to reward. During the first downturn of Turkish bonds, stocks and the lira - Asia and Mexico weren't greatly affected whereas S. Africa and Argentina which were already showing financial fissures saw sell-offs.

What does that mean?

So, what does an emerging economy like Turkey have to do with a forex trader on the other side of the word? Market volatility can present itself as both opportunity and risk - and something like the crashing of the Turkish economy - turns volatility up to 11. Even oil saw a slight dip when investors exited more volatile assets as their confidence slumped.

Protecting your investment with exclusive risk managements tools, using news and technical data to discern opportunity from pitfall, is crucial during these periods.

This article was submitted by easyMarkets