SYDNEY (Reuters) – Asian markets faced a new stress test on Monday, with a drop in the Turkish lira raising the safe-haven yen and reducing risk appetite, although the consequences so far appear to be relatively contained.
The dollar was trading almost 15% higher at the 8,300 lira after President Tayyip Erdogan shocked the markets by replacing the Turkish central bank governor with a critic with the same opinion about high interest rates.
“Erdogan’s decision to dismiss Governor Agbal, who sought to instill some price stability and a perception of the Bank’s independence, now raises the question of whether the new governor will seek lower rates and still aim to combat rising inflation,” said Rodrigo Catril, senior FX strategist at NAB.
The uncertainty was enough to see Nikkei’s futures drop to 29,280, pointing to an initial drop from Friday’s 29,792 cash close.
Nasdaq futures fell 0.3% and S&P 500 futures 0.2%. June futures contracts for 10-year Treasury bills rose by just 1 tick, suggesting that there was no major rush to security.
Investors are still struggling to cope with the recent rise in US bond yields, which has made stock valuations in some sectors, mainly technology, looking stretched.
The bonds had another fluctuation on Friday, when the Federal Reserve decided not to extend a capital grant to banks, which could dampen its demand for Treasury bills.
The damage was limited, however, by the Fed’s promise to work on the rules to avoid tensions in the financial system.
The fall of the lira on Monday caused the yen to steady modestly, with notable gains against the euro and the Australian dollar. This, in turn, dragged the euro slightly down against the dollar to $ 1.1880.
After an initial drop, the dollar soon stabilized at 108.86 yen, while the dollar index rose slightly at 92.080.
Also raising the yen are the concerns of Japanese retail investors who have built lira buying positions, a popular business for the income-hungry sector that can be squeezed, triggering another round of lira sales.
Still, Citi analysts doubt that the episode will lead to widespread pressure on emerging markets, noting that the last time the lira fell in 2020, there was little repercussion.
“In terms of the impact on other parts of high-performance EM, we believe it will be very limited,” said Citi in a note.
There was little sign of safe haven demand for gold, which decreased 0.3% to $ 1,739 an ounce.
Oil prices fell again, having dropped nearly 7% last week, with concerns about global demand driving speculators to take profits on long positions after a long bullish run. [O/R]
Brent was out of 29 cents at $ 64.24 a barrel, while US oil lost 24 cents to $ 61.18 a barrel.
Wayne Cole reporting; Peter Cooney edition