Asian shares skid as markets feel the heat of the Turkish rout

Sydney — Asia share markets skidded and the euro hit one-year lows on Monday as a renewed rout in the Turkish lira infected the rand and drove demand for safe harbours, including the dollar, the Swiss franc and the yen.

The run from risk dragged MSCI’s broadest index of Asia-Pacific shares outside Japan down 1.3% to a five-week low. Japan’s Nikkei lost 1.6% with every bourse in the region in the red.

E-mini futures for the S&P 500 were off 0.4%, while 10-year treasury yields dipped further to 2.85%.

China’s blue-chip index shed 1.4%, while Hong Kong stocks lost 1.6% as the local dollar fell to the limits of its trading band.

Much of the early action was in currencies with the euro gapping lower as the Turkish lira took another slide to record around 7.2400.

The lira found just a sliver of support when Turkish finance minister Berat Albayrak said the country had drafted an action plan to ease investor concerns and the banking watchdog said it limited swap transactions.

Yet the dollar was still up almost 10% on the day at 7.0000 lira. A month ago it was at 4.8450.

The currency tumbled on worries over Turkish President Tayyip Erdogan’s increasing control over the economy and deteriorating relations with the US.

“The plunge in the lira which began in May now looks certain to push the Turkish economy into recession and it may well trigger a banking crisis,” said Andrew Kenningham, chief global economist at Capital Economics.

“This would be another blow for EMs [emerging markets] as an asset class, but the wider economic spillovers should be fairly modest, even for the eurozone,” he said.

Kenningham noted Turkey’s annual GDP of about $900bn was just 1% of the global economy and slightly smaller than the Netherlands.

The Turkish equity market was less than 2% of the size of the UK market, and only 20% was held by non-residents, he said.

“Nonetheless, Turkey’s troubles are a further headwind for the euro and are not good news for EM assets either.”

Banks exposed

Indeed, the single currency sank to a one-year trough against the Swiss franc around Sf1.1300, while hitting a 10-week low on the yen around ¥125.45.

Against the US dollar, the euro touched its lowest since July 2017 at $1.13700. It was last at $1.1380 and still a long way from last week’s top at $1.1628.

The dollar eased against the safe-haven yen to ¥110.21, but was a shade firmer against a basket of currencies at 96.431.

The Argentine peso and the rand were also caught in the crossfire, with the dollar adding 5% on the rand.

Dealers said Japanese retail investors had been squeezed out of long positions in the rand sending the yen steaming higher.

“Contagion risks centre on Spanish, Italian and French banks exposed to Turkish foreign currency debt, as well as Argentina and SA,” warned analysts at ANZ.

“Turkey’s massive pile of corporate debt denominated in foreign currencies, but a rapidly sliding currency — and inflation that’s threatening to go exponential – is a toxic combination.”

In commodity markets, gold found little in the way of safety flows and was last down at $1,208.21/oz.

Oil prices were mixed with Brent off 14c at $72.67 a barrel, while US crude added 2c to $67.65.

Reuters