Turkish crisis spreading into other markets

The Turkish Lira resumed its drop early Monday touching a new record low of 7.21 per dollar before recovering slightly during Asia trade. Comments from President Recep Tayyip Erdogan and Finance Minister Berat Albayrak over the weekend that a plan would be revealed today to calm the markets failed to restore confidence.  

With inflation expected to run above 20%, a current account deficit that continues to widen, bond yields trading at record highs and growing political tensions with the U.S., the Turkish administration have limited choices to stop the Lira from bleeding.

Investors need to see serious economic measures and not political ones to prevent things getting completely out of control. This includes an emergency interest rate hike by the central bank, imposing capital controls, fiscal reforms, securing a rescue package by the IMF or other lenders and ending the current diplomatic fight with Donald Trump. Until such steps are taken, investors will continue to selloff Turkish assets.

The risk-off sentiment spread into other markets with the South African Rand plunging more than 10% early Monday to trade at a two-year low of 15.32 per dollar. The Argentina Peso and Russian Ruble were also amongst the biggest decliners in Emerging Market currencies. Meanwhile, the Euro fell below 1.14 against the Dollar as investors try to assess the damage Turkey may cause to European banks;the Spanish, French, and Italian in particular have huge exposure to Turkish debt.

Equity markets across Asia were also smashed, with the Nikkei, KOSPI, Shanghai and Hong Kong indices all falling more than 1.6%. Investors should expect a similar reaction when European markets open today, with banks to lead the declines.

The Dollar benefitted from the ongoing EM turmoil hitting a one-year high of 96.50. Also supporting the Dollar was recently released economic data which showed core CPI making its biggest advance in a decade, rising 2.4% from last year. The Federal Reserve may have no choice but to keep tightening policy with two more rate hikes this year leading to further divergence in monetary policies. While a stronger Dollar puts the U.S. in a weaker position in the ongoing trade war, investors continue to wonder whether Trump will make another attempt to drag the greenback lower.