Turkish concerns weigh on sentiment

Markets remain in a defensive mode at the start of the week as the crisis in Turkey shows little sign of reaching a satisfactory conclusion anytime soon. The Turkish Lira fell to fresh lows late last night as investors continue to be skittish as far as the currency is concerned. The adverse impact of these developments can be also felt elsewhere with European stock markets falling lower and the USD and JPY both benefiting from safe-haven flows.

Contagion risks on the rise

The attempts by Turkey to halt the demise of the Lira and the country’s soaring bond yields has proven inadequate thus far. Calls from president Erdogan for citizens to abstain from exchanging their currency for foreign equivalents and a statement from the Turkish interior ministry that they will look to take action against the bad mouthing the economy on social media are clearly not going to be enough to spark a recovery, and the longer this goes on without concrete steps being taken towards an amicable solution the greater the risk of contagion.  

Other emerging market currencies such as the South African Rand, the Argentinian and Mexican Pesos and the Russian Rouble are all looking vulnerable to further declines, while a benchmark of global emerging stock markets has fallen near to its lowest level of the year. As a sign of how wild the recent market gyrations have been, the 10-day volatility in the Lira has now surpassed that of Bitcoin.    

Investors await affirmative action

Turkey’s central bank has said it is ready to take all necessary measures to ensure financial stability after the Lira’s collapse, but the market seems to be not buying it just yet. Investors will want to see affirmative actions, such as a substantial hiking of interest rates, before they begin to believe that the worst is over, as at the moment the comments seem to be more a case of empty rhetoric. Reports last week that several of the country’s largest banks may struggle to continue operating as a going concern if the USDTRY breached the 7.1 level caught immediate attention, and with the pair tagging this region late last night investors will remain on high alert for any additional signs of the crisis deepening further.