markets

No respite in sight for Turkish lira, European equities

Emerging markets may weaken with Turkish markets, some developed markets to see the other way as Fed chair speech watched

Siddesh Suresh Mayenkar, Senior Reporter
18:13 August 19, 2018

Dubai: The woes of Turkey and its currency lira seem to be far from over, at least in the short term.

After losing 11.5 per cent of its value last week, Turkish lira may be in for a free fall even as holidays this week are expected to keep trading thin.

The Turkish currency may continue to resume its fall after a three-day pause last week as a ratings agency cut the sovereign ratings to near the junk category.

“Turkey and trade is likely to remain on investors’ mind this week. Investors will see if some concrete steps are taken to stabilise the currency in Turkey and toning down of rhetoric between the US and Turkey,” said Aditya Pugalia, Director, Financial Markets Research, Emirates NBD.

Turkish lira closed 3.15 per cent higher to 6.0175 on Friday. The currency has shed more than 80 per cent of its value, making it the worst performing currency in the world.

Last week, the US warned of more sanctions if their pastor Andrew Brunson, whom Turkey accused of playing a part in the 2016 attempted coup, is not freed.

“While no new information was made available by the Finance Minister, it was reassuring to know that any form of capital control is not on the government’s agenda,” said Abhishek Kumar, lead emerging market debt manager, State Street Global Advisors.

“The market seems to have had lost all hope from Turkey but clearly the global linkages of a country which was once considered for inclusion in the EU are too deep to ignore,” he added.

Most of the contagion impact may felt on the European stock markets through their banks, which has an exposure of billions of euros to the crises-hit country.

Germany and Italy are the biggest exporters to Turkey in terms of size of exports with Germany exporting almost 25 billion euros to Turkey. Netherlands has the most foreign direct investment at about 18 billion euros and Spanish banks are the most exposed with total exposure of about 65 billion euros.

“The developed market impact is chiefly in European banks. However, we find exposures to be far smaller than headlines suggest: if Turkey defaults overnight, some of the most exposed Spanish banks would probably wipe just one year of earnings,” said Maya Bhandari, Multi-asset portfolio manager at Columbia Threadneedle Investments.

The Euro Stoxx 600 index closed 0.10 per cent lower to 381.06 after losing 1.24 per cent in the past week. The MSCI emerging market index closed 0.13 per cent higher to 1,022.94. The US markets witnessed limited impact from Turkey. The Dow Jones Industrial Average closed 0.43 per cent higher to 25,669.32, after gaining more than 1.4 per cent in the past five sessions. Markets will closely watch Federal Reserve chair Jerome Powell’s speech at the Fed’s annual Jackson Hole conference on August 24 for indications on the monetary policy.

Oil outlook

Brent crude, which has been challenging key technical indicators recently, may see more weakness in the coming weeks amid rising US inventory and a slowdown in demand from emerging markets.

Brent crude closed 0.56 per cent higher to $71.83 per barrel, on Friday, while West Texas Intermediate closed 0.69 per cent higher to $65.91 per barrel.

“An EM slowdown carries a big risk of longer-term slowdown in demand growth, the short-term supply outlook still looks challenging and should attract some attention eventually,” said Ole Hansen, head of commodity strategy at Saxo Bank.