SYDNEY (Reuters) – Asian markets were holding their nerves on Monday, with the fall of the Turkish lira testing risk appetite, with stocks and bonds showing only a limited offer for safe havens.
The dollar was trading 12% higher at the 8.100 lira, but outside an initial peak of 8.4850 amid speculation that Turkish authorities would intervene to contain the defeat.
The fall came after President Tayyip Erdogan shocked the markets by replacing the Turkish central bank governor with a critic of 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.
After an initial fluctuation, sentiment seemed to stabilize and the broader MSCI index for Asian Pacific equities outside Japan was practically stable.
Japan’s Nikkei fell 1.4%, without help from the rumor. Japanese retail investors may face losses on large long positions on the high yield lira.
Nasdaq futures jumped 0.1%, while S&P 500 futures fell slightly 0.1%. Yields on 10-year Treasury notes fell some basis points to 1.71%, suggesting that there was no widespread race for 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.
A number of Fed officials speak this week, including three appearances by President Jerome Powell, providing many opportunities for further volatility in the markets.
OBSERVING EMERGING MARKETS
The fall of the lira on Monday caused the yen to steady modestly, with gains on the euro and the Australian dollar. This, in turn, dragged the euro slightly down against the dollar to $ 1.1889.
After an initial drop, the dollar soon stabilized at 108.86 yen, while the dollar index rose slightly at 92.080.
Also supporting the yen were the concerns of Japanese retail investors who built lira buying positions, a popular negotiation for the income-hungry sector that could be squeezed and trigger 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 53 cents at $ 64.00 a barrel, while US oil lost 55 cents to $ 60.87 a barrel.
Wayne Cole reporting; Edition by Peter Cooney and Lincoln Feast.