Emerging market rout eases after ‘manic monday’ Turkey contagion

Selloffs in emerging markets eased Tuesday after Turkey’s meltdown rippled across the globe, sending stocks and currencies to their lowest levels in at least a year.

Read: South Africa is no Turkey: It’s not going to prop up the rand

The MSCI EM index of currencies was little changed as of 10:30 a.m. in Singapore, while the measure tracking developing-nation equities fell 0.2%. Some emerging currencies rose in early Asia trading, with the rand adding 0.6% against the dollar and the Mexican peso climbing 0.1%. The lira hovered near 7 per dollar after plunging 6.6% on Monday.

Fear that the Turkish meltdown will spill over to other emerging markets is intensifying after the nation’s first steps to bolster the financial system were seen by some strategists as insufficient. President Donald Trump’s top national security aide warned Turkey’s ambassador on Monday that the US has nothing further to negotiate until a detained American pastor is freed, according to two people familiar with the matter, signaling a standoff between the countries will continue. Still, some analysts say there are few fundamental reasons to add the whole developing world to the same basket.

“After a large selloff triggered by the rout in Turkey, some investors may have bought emerging currencies on dips,” said Toru Nishihama, Tokyo-based emerging-market economist at Dai-ichi Life Research Institute Inc. “The global economy is still expanding and that’s providing underlying support for the emerging markets. But Turkey’s problems from its spat with the US, issues of central bank independence and inflationary pressures are not resolved, which means downward pressure on Turkish assets will continue for a while.”

The lira has declined 30% over the past month, reaching a record low as President Recep Tayyip Erdogan lashed out at the US, took higher rates off the table and said he wouldn’t accept an international bailout, traders pushed down Turkish assets in a selloff that spilled over to other developing countries. The currency fell 0.5% to 6.92 per dollar on Tuesday.

Turkey’s market turmoil didn’t just erase a July rebound in emerging-market stocks — it also made them the cheapest since early 2016, before a two-year, 60% rally. At 10.8, the MSCI Emerging Markets Index’s 12-month blended forward price-to-estimated earnings ratio is now also below where it was after a sell-off in the second quarter.

“EM has already seen a large selloff between April to July and negative developments in Turkey will eventually be seen (along with Argentina) as isolated given their exceptional external imbalances compared to most EM countries,” JPMorgan analysts including Luis Oganes and Jonny Goulden wrote in note to clients.