Turkey’s currency crisis unsettles investors

Turkey’s worsening currency crisis has prompted investors to dump equities causing World markets to tremble
 on Monday.

Investors have instead fled to safer assets such as government bonds and the dollar.

The MSCI world equity index, which tracks shares in 47 countries, was down 0.5 per cent on Monday and 1.6 per cent since Friday’s open as the Turkish lira plunged
to a record low, forcing the country’s finance minister to announce an economic action plan to ease nerves .

The
lira has tumbled on worries over Turkish President Tayyip Erdogan’s
increasing control over the economy and deteriorating relations with the
United States.

 It fell as much as 12 per cent at one stage on Monday, then recovered to a loss of 7 per cent by 0800 GMT.

“There’s
a risk-off mood generally triggered by the Turkish currency sell off,
and we are seeing a wider sell-off now, and it’s looking pretty ugly in
other
emerging markets as well,” said Investec economist Philip Shaw.

He pointed to the South African rand and the Mexican peso, both down about 2.5 per cent on Monday, as two examples of emerging markets hit by contagion.

“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 as an asset class.”

Turkish
credit default swaps – a hedge against financial turbulence – surged to
their highest since the 2008 global financial crisis as the lira took
its latest
dive.

The
euro zone has also been hit by Turkish woes, particularly after a
report by the Financial Times last week suggested the European Central
Bank is increasingly
concerned about euro zone banks with exposure to Turkey.

The euro fell to a one-year low against the dollar on Monday and sank to a one-year trough against the Swiss franc as well. It hit a 10-week low to the yen around
125.45.

European stocks fell in early trade on Monday, with a pan-European index of shares down half a per cent and the banking stock index as much as 1.2 per cent lower.

This
after MSCI’s broadest index of Asia-Pacific shares outside Japan
dropped 1.5 per cent to a near one-year low. Japan’s Nikkei lost 2.0 per
cent with every
bourse in the region in the red.

Safe-haven
government bonds were in demand, with yields on German 10-year debt,
the benchmark for the euro zone, dropping to a one-month low. Overnight,
U.S.
Treasury 10-year yields also dipped to the lowest in just over three
weeks at 2.85 percent.

Copper prices, meanwhile, often seen as a proxy for global economic growth, were down 1 percent at $6,131 a tonne.

In other commodity markets, gold was last down half a per cent at $1,204 an ounce.

Oil prices fell, with Brent crude off 25 cents at $72.56 a barrel and U.S. crude 21 cents lower at $67.43.

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(Reuters)