SYDNEY (Reuters) – Asian markets turned mixed and bonds rebounded on Monday as the Turkish lira’s plunge sparked talk that capital controls may be necessary to stem the meltdown, although the wider fallout has been relatively tied for now.
The dollar was trading 12% higher against the lira at 8.0500, but that was far from the early peak at 8.4850 amid speculation that the Turkish authorities should step in.
The decline came after President Recep Tayyip Erdogan shocked the market by replacing the hard-line Turkish central bank governor with a critic of high interest rates.
“It will leave the authorities with two options, either they pledge to use interest rates to stabilize the markets, or they impose capital controls,” said Bear Hammarlund, chief emerging market strategist at SEB Research.
“Given the increasingly authoritarian approach taken by President Erdogan, capital controls seem the most likely option.”
The uncertainty drove Japan’s Nikkei index down 1.8%, partly due to speculation that Japanese retail investors could face losses on large longs in the higher-yielding lira.
Ripples were more modest elsewhere, with the MSCI Asia Pacific Index of broadest stocks outside of Japan adding 0.2%, supported by a 0.8% rise in Chinese blue-chips.
EUROSTOXX 50 futures are down 0.2% and FTSE futures are 0.1% lower. Nasdaq futures rose 0.4%, while S&P 500 futures slumped either side.
The 10-year Treasury yield fell by five basis points to 1.68%, indicating some preferred safe-havens.
Investors are still struggling to deal with the recent spike in US bond yields, which has left equity valuations for some sectors, especially technology, stretched.
The bonds were wobbling again on Friday when the Fed decided not to extend the capital concession to banks, which could reduce their demand for Treasury bonds.
The damage was limited, however, by the Fed’s promise to work on the rules to prevent tensions in the financial system.
A slew of Fed officials are speaking this week, including three appearances by President Jerome Powell, providing plenty of opportunity for more volatility in the markets.
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A weaker lira on Monday stabilized the yen modestly, with notable gains in the euro and the Australian dollar. This, in turn, caused the euro to fall slightly against the dollar, to $ 1.1885.
After the initial slide, the dollar quickly settled at 108.86 yen, while the dollar index settled at 92.077.
The yen also supported the concerns of Japanese retail investors who set up lira long positions, which is a common trade for the return-hungry sector, and it may be curtailed, leading to another round of lira selling.
However, analysts at Citi doubt that this incident will lead to widespread pressure on emerging markets, noting that the last time the lira weakened in 2020, there was little repercussion.
“In terms of the impact on other parts of the high yielding emerging markets, we believe that will be very limited,” Citi said in a note.
There were scant signs of safe-haven demand for gold, which fell 0.5% to $ 1,735 an ounce.
Oil prices are down again, after tumbling nearly 7% last week as concerns over global demand prompted speculators to take profits from long positions after a long bullish period.
Brent slipped 37 cents to $ 64.16 a barrel, while US crude fell 68 cents to $ 60.74.
Reporting from Wayne Cole. Edited by Lincoln West and Christian Schmöllinger