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Turkey shock spooks stocks

Published 03/21/2021, 06:51 PM
Updated 03/22/2021, 06:20 AM
© Reuters. FILE PHOTO: Turkish lira banknotes are seen in this illustration

© Reuters. FILE PHOTO: Turkish lira banknotes are seen in this illustration

By Wayne Cole

SYDNEY/LONDON (Reuters) - Stocks slid and the Turkish lira tumbled towards a record low against the dollar on Monday after President Tayyip Erdogan shocked investors by replacing Turkey's hawkish central bank governor with a critic of high interest rates.

Erdogan's move shunted the lira down as much as 15% against the dollar, the sharpest change since August 2018 when Turkish markets were in another of their periodic crises.

"The authorities will be left with two choices, either it pledges to use interest rates to stabilise markets, or it imposes capital controls," said Per Hammarlund, senior EM strategist at SEB Research.

"Given the increasingly authoritarian approach that President Erdogan has taken, capital controls are looking like the most likely choice."

By 0800 GMT, the currency had recovered some of its losses to trade around 7.9904 as Finance Minister Lutfi Elvan said Turkey would stick to free market rules.

The uncertainty saw the index of Europe's 600 largest stocks fall 0.5%, a milder reaction than an earlier 1.5% fall in Japan's Nikkei as retail investors faced potential losses on large long positions in the high-yielding lira.

Euro zone banks exposed to the country such as Spain's BBVA (MC:BBVA), Italy's UniCredit, France's BNP Paribas (OTC:BNPQY), and Dutch bank ING fell between 1.6% and 5.2%.

The ripples were more modest elsewhere, with U.S. stock futures close to flat.

Yields on 10-year Treasury notes edged down five basis points to 1.68%, suggesting some investors favoured safe havens.

Investors are still struggling to deal with the recent surge in U.S. bond yields, which has left equity valuations for some sectors, particularly tech, looking stretched.

Bonds had another wobble on Friday when the Federal Reserve decided not to extend a capital concession for banks, which could lessen their demand for Treasuries.

The damage was limited, however, by the Fed's promise to work on the rules to prevent strains in the financial system.

A host of Fed officials speak this week, including three appearances by Chair Jerome Powell, providing plenty of opportunity for more volatility in markets.

WATCHING EMERGING MARKETS

Monday's tumble in the lira saw the yen firm modestly, with notable gains on the euro and Australian dollar. That in turn dragged the euro down slightly on the dollar to $1.1890.

After an initial slip, the dollar soon steadied at 108.80 yen, while the dollar index was down slightly at 91.942.

Also supporting the yen were concerns Japanese retail investors that have built long lira positions, a popular trade for the yield-hungry sector, might be squeezed out and trigger another round of lira selling.

Still, analysts at Citi doubted that the episode would lead to widespread pressure on emerging markets, noting the last time the lira slid in 2020, there was little spillover.

"In terms of impact on other parts of the high-yielding EM, we believe that will be quite limited," Citi said in a note.

There was scant sign of safe-haven demand for gold, which eased 0.7% to $1,731 an ounce.

Oil prices fell anew, having shed almost 7% last week as concerns about global demand prompted speculators to take profits on long positions after a long bull run. [O/R]

© Reuters. Market makers work on the trading floor at IG Index in London

Brent crude was down 60 cents, or 1%, at $63.94 a barrel by 0836 GMT. U.S. oil was off by 56 cents, or 0.9%, at $60.86 a barrel. Both contracts fell by more than 6% last week.

Latest comments

Who cares.
D0nkey writers know nothing and vomiting out such trash. Cmon
even lira can affect the world mkt. i guess the world is coming to an end.
Lira is so insignificant to the total world GDP , you tell me its weakening can push up USD, are you kidding? This is news manipulation, anti wisdom , treating the public like pig !
such a lame article.
Yes, the AI engineerers are d*** ! All of them should be fired !
So Turkey is the cause affecting world stock markets?  Let me sit down before I fall from laughing! Good now, next we will here Congo's presidential elect who is sick with COVID19 caused flash crash sometime later in the week! Reuters must be using some beta Ai that still needs lots of learning to come up with something logical.
try to remember panic turmoil because of Greece 10 years ago
 That is different because Greece uses Euro, and it is part of the EU, which affected the whole European banking system.  Please compare apples to apples and not apples to zucchini.
computer?
President Xi says buy BTT
This news does not shock us. Now, normally, we have a free market in Turkey. We have a bad management of the economy and have been threatened many times by the American administration and intelligence in recent years. We have a country stuck between United States and Russia, and we are also a candidate for the European Union, but they don't accept it. Government and other countries have problems, there is no problem in our companies. So yes, hard days are waiting for us.
Marker goes down, because of Turkey .That's a new one.
wow
oh now Turkey is the problem??? Ha!! good one!
They will use a cloudy day as a problem.
nice
EM contagion is the problem.
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