SYDNEY (Reuters) – Asian markets were mixed and bonds jumped on Monday, with a drop in the Turkish lira leading to rumors that capital controls may be needed to contain the defeat, although broader rainfall has been relatively contained in the time.
The dollar was trading 12% higher against the lira at 8.0500, but outside an initial peak of 8.4850 amid speculation that Turkish authorities would have to intervene.
The fall came after President Tayyip Erdogan shocked the markets by replacing the Turkish central bank governor with a critic of high interest rates.
“The authorities will have two options, either promise to use interest rates to stabilize markets or impose capital controls,” said Per Hammarlund, senior EM strategist at SEB Research.
“Given President Erdogan’s increasingly authoritarian approach, capital controls appear to be the most likely choice.”
Uncertainty caused Japan’s Nikkei to fall 1.8%, partly due to speculation that Japanese retail investors could face losses on large long positions on the high yield lira.
The swings were more modest elsewhere, with the broader MSCI index for Asia Pacific stocks outside Japan, adding 0.2%, aided by a 0.8% increase in Chinese blue chips.
EUROSTOXX 50 futures declined 0.2% and FTSE futures 0.1%. Nasdaq futures stood at 0.4%, while S&P 500 futures faltered on both sides of stability.
Yields on 10-year Treasury notes fell five basis points, to 1.68%, suggesting some favored safe havens.
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 notable gains against the euro and the Australian dollar. This, in turn, dragged the euro slightly down against the dollar to $ 1.1885.
After an initial drop, the dollar soon stabilized at 108.86 yen, while the dollar index remained at 92.077.
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 doubted that the episode would 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 by 0.5% to $ 1,735 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.
Brent fell 37 cents to $ 64.16 a barrel, while US oil dropped 68 cents to $ 60.74.
Wayne Cole reporting; Lincoln Feast and Christian Schmollinger edition