The S&P 500 is the proxy on global market stability.  And stocks were shaken on Russia back in 2014.  When the ruble collapsed, U.S. stocks lost 5% of its value in just 7 days.

But the decline was fully recovered in just 3 days.

Given the similarities of these two currency crises (a currency attack on a bad behaving leader), I thought we might see the same behavior in stocks this time.  And that’s what we appear to be getting – a shallower decline but a swift recovery.

So, why the quick recovery?

As we also discussed on Tuesday, while the Turkish lira has been the center of attention in the financial media, the real reason global markets were shaking had more to do with China.

If a currency crisis that started in Turkey ended in China, there would be big geopolitical fallout.

As we’ve discussed over the past month, the biggest risk from China is a big one-off devaluation. That would stir up a response from other big trading partners (i.e. Europe and Japan), where they would likely coordinate to block trade from China all together. That’s where things would get very ugly and likely (ultimately) culminate in a military war.

But the probability of that outcome was reduced yesterday.  We had news that a China delegation would travel to the U.S. to re-open trade negotiations.  They’re coming back to the table.

So we should expect concessions from China. That’s good news for the globlal economy and for global stability.  And that news drove the big bounce in stocks yesterday, which continued today.   I suspect this will be the catalyst to get stocks back on the path toward a double-digit gains by year-end.

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Now, the problems in Turkey aren’t new.  The country is economically fragile.  But the collapse in the currency probably has more to do with its leadership – and the erosion of democracy in Turkey.

There are a lot of people comparing Turkey’s currency crisis to the Thai Baht devaluation in 1997 — which ultimately ignited a currency crisis in Asia, which culminated in a sovereign default in Russia.  That’s the fear: a currency crisis turning into a contagion of sovereign debt defaults.

But Thailand was about economic policy – specifically, the Thai currency policy.  Speculators attacked to close the valuation gap between the central bank managed currency and its economy.

This Turkey issue looks more like the collapse in the Russian Ruble in late 2014.  That was geopolitically driven.  Back in 2014, Putin was forcing his way into Ukraine – an affront to the Western world.  This was viewed as a proxy war against the West. That led to capital flight out of Russia and speculative attack on the currency.

With this chart on the Ruble (the orange line going up means a stronger dollar and weaker ruble), Russia was quickly made vulnerable and on a sovereign debt default watch.

But like Turkey, the contagion risk was driven by Russia’s foreign currency denominated debt (primarily euro denominated debt owed to European banks).