SYDNEY (Reuters) – Asian markets faced a fresh stress test on Monday as the weakening of the Turkish lira lifted the safe-haven yen and dampened risk appetite, although the fallout so far appeared to be relatively contained.
The dollar was trading up nearly 15% on the lira at 8.3000 after President Recep Tayyip Erdogan shocked markets by replacing the hawkish central bank governor of Turkey with a similar critic of higher interest rates.
“Erdogan’s decision to sack Governor Aghbal, who sought to cement some price stability and envision the independence of the bank, now raises questions about whether the new ruler will consider lowering interest rates while still aiming to combat rising inflation,” said Rodrigo Katrell. Chief Forex Strategist at NAB.
The uncertainty was enough to see Nikkei futures tumbling to 29,280, indicating a lower opening from Friday’s monetary close at 29,792.
Futures on the Nasdaq fell 0.3% and the Standard & Poor’s 500 0.2%. June 10-year Treasury futures rose only one mark, indicating no broad rally towards safety.
Investors are still struggling to deal with the recent spike in US bond yields, which has left equity valuations for some sectors, especially technology, stretched.
The bonds were wobbling again on Friday when the Fed decided not to extend the capital concession to banks, which could reduce their demand for Treasury bonds.
The damage was limited, however, by the Fed’s promise to work on the rules to prevent tensions in the financial system.
A weaker lira on Monday stabilized the yen modestly, with notable gains in the euro and the Australian dollar. This, in turn, caused the euro to fall slightly against the dollar, to $ 1.1880.
After the initial slide, the dollar quickly settled at 108.86 yen, while the dollar index was higher at 92.080.
The yen’s appreciation also led to fears of Japanese retail investors setting up lira long positions, a common trade for the yield-hungry sector, that could be curtailed, leading to another round of lira selling.
However, analysts at Citi doubt that this episode will lead to widespread pressure on emerging markets, noting that the last time the lira weakened in 2020, there had been few repercussions.
“In terms of the impact on other parts of the high yielding emerging markets, we believe that will be very limited,” Citi said in a note.
There were few signs of safe-haven demand for gold, which fell 0.3% to $ 1,739 an ounce.
Oil prices are down again, after tumbling nearly 7% last week as concerns over global demand prompted speculators to take profits from long positions after a long bullish period. [O/R]
Brent lost 29 cents at $ 64.24 a barrel, while US crude lost 24 cents to $ 61.18 a barrel.
Reporting from Wayne Cole. Edited by Peter Cooney