Turkish lira firms, emerging stocks struggle

The Turkish lira firmed on Monday after comments from the finance minister cemented expectations of an interest rate hike this week, but emerging equities struggled in the face of new trade war threats.

The lira rose 0.8% against the US dollar, leading emerging currency gains, ahead of Tuesday’s central bank meeting. Markets expect rates to rise 100-125 basis points after inflation hit a 14-year high in June.

Those expectations were strengthened when finance minister Berat Albayrak was quoted as saying that Turkey would not fight with markets but pursue a “win-win” relationship with them.

Rabobank strategist Piotr Matys said Albayrak’s comments were “constructive”, highlighting his defence of central bank independence and economic reforms.

But he warned Albayrak would have to follow these positive comments with concrete measures, “and if that happens then confidence amongst investors should be gradually restored”.

Matys expects a 100-basis-point rise to 18.75% but warned that if Turkey held rates, that would be a negative signal, reigniting concerns about central bank independence.

These concerns had intensified after Turkey’s President Tayyip Erdogan made his son-in-law treasury and finance minister. Erdogan has repeatedly called for lower interest rates so Albayrak is being watched to see if he will take a more orthodox line.

Turkish stocks also rose, gaining 1.4% to hit a two-week high while the banking sector rallied 2.3%.

Sentiment towards emerging assets remained subdued, however, following threats from US President Donald Trump on Friday to impose tariffs on all $500 billion of imported goods from China.

China’s yuan retreated 0.4% in offshore markets, though Chinese mainland stocks bounced about 1%, with investors relieved that new draft rules on banks’ wealth management products were unlikely to crimp liquidity.

Meanwhile, Rusal’s Hong Kong-listed shares leapt almost 15% to a 3-1/2-month high after the US Treasury said it was open to removing the aluminium producer from the US sanctions list.

Russian shares rose 0.7% and the rouble firmed 0.6%, underpinned by oil prices hurdling $73 a barrel.