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Turkey's lira shock spooks global stocks

·3-min read

Stocks have slid and the Turkish lira has tumbled towards a record low against the US dollar after President Recep Tayyip Erdogan shocked investors by replacing Turkey's hawkish central bank governor with a critic of high interest rates.

Erdogan's move shunted the lira down as much as 15 per cent against the dollar, the sharpest change since August 2018 when Turkish markets were in another of their periodic crises.

"The authorities will be left with two choices, either it pledges to use interest rates to stabilise markets, or it imposes capital controls," said Per Hammarlund, senior EM strategist at SEB Research.

"Given the increasingly authoritarian approach that President Erdogan has taken, capital controls are looking like the most likely choice."

The currency had recovered some of its losses on Monday morning to trade about 7.9904 as Finance Minister Lutfi Elvan said Turkey would stick to free market rules.

The uncertainty saw the index of Europe's 600 largest stocks fall 0.5 per cent, a milder reaction than an earlier 1.5 per cent fall in Japan's Nikkei as retail investors faced potential losses on large long positions in the high-yielding lira.

Euro zone banks exposed to the country such as Spain's BBVA , Italy's UniCredit, France's BNP Paribas and Dutch bank ING fell between 1.6 per cent and 5.2 per cent.

The ripples were more modest elsewhere, with US stock futures close to flat.

Yields on 10-year Treasury notes edged down five basis points to 1.68 per cent, suggesting some investors favoured safe havens.

Investors are still struggling to deal with the recent surge in US bond yields, which has left equity valuations for some sectors, particularly tech, looking stretched.

Bonds had another wobble on Friday when the Federal Reserve decided not to extend a capital concession for banks, which could lessen their demand for Treasuries.

Monday's tumble in the lira saw the yen firm modestly, with notable gains on the euro and Australian dollar . That in turn dragged the euro down slightly on the dollar to $US1.1890.

After an initial slip, the dollar soon steadied at 108.80 yen, while the dollar index was down slightly at 91.942.

Also supporting the yen were concerns Japanese retail investors that have built long lira positions, a popular trade for the yield-hungry sector, might be squeezed out and trigger another round of lira selling.

There was scant sign of safe-haven demand for gold, which eased 0.7 per cent to $US1,731 an ounce.

Oil prices fell anew, having shed almost seven per cent last week as concerns about global demand prompted speculators to take profits on long positions after a long bull run.

Brent crude was down 60 cents, or one per cent, at $US63.94 a barrel. US oil was off by 56 cents, or 0.9 per cent, at $US60.86 a barrel. Both contracts fell by more than six per cent last week.