Turkey's turmoil shakes global financial markets

Investors fear Turkey’s plight will spread into emerging markets where currencies and economies are also weak.
Turkish President Recep Tayyip Erdogan blames the currency crisis on outsiders.

Turkeys economic crisis and collapsing currency continued to spill over to global markets, depressing share prices and pushing up the value of haven currencies.

Oil prices fell and bond yields rose as investors had little faith that President Recep Tayyip Erdogans Islamic dictatorship could cope with a perfect storm of rampant inflation, heavy overseas borrowing and plunging demand.

In typical autocratic style, he blames the crisis on outsiders. “We will not retreat from our position,” he said, adding Turkey wouldn’t allow the US “to lay its hands on achievements we gained at the cost of blood.”

Investors fear Turkeys plight will spread into emerging markets where currencies and economies are also weak.

Turkey’s finance minister, Berat Albayrak, who is Mr Erdogan’s son-in-law, announced emergency measures that lowered the level of reserves local lenders must lodge with the central bank.

“The lira is in a free fall and the measures announced so far simply aren’t enough,” Aberdeen Standard Investments portfolio manager for emerging-market debt Kevin Daly says. “It’s fuelling the negative sentiment and the disappointment among investors.”

The lira fell further to 7.0 to the US dollar, raising doubts for the mainly European bank lenders.  The Bank for International Settlements says Spanish banks lent $US80.9 billion to banks based in Turkey in the first quarter and French banks lent $US35.15b.

The yield on two-year Turkish government bonds jumped to an eye-watering 25.12% while the stock benchmark BIST 100 shed around 2.5%.

Wall Street declines
On Wall Street, shares of materials companies led declines in the Dow Jones Industrial Average and the S&P 500.

The Dow lost 125.44 points, or 0.5%, to 25,187.70. The S&P 500 declined 0.4% to 2821.93 and the technology-heavy Nasdaq Composite shed 0.25% to 7834.

Other global stock markets declined, The Stoxx Europe 600 fell 0.2%. Frances CAC 40 slipped 0.04%, Germanys DAX fell 0.5% and the UKs FTSE 100 eased 0.3%.

Asian stocks declined, with the Shanghai Composite Index losing 0.3% and Hong Kong’s Hang Seng shedding 1.5%. Japan’s Nikkei Stock Average dropped 2%, while Indonesia’s JSX index fell 3.6%.

The biggest action was in the currency and bond markets. The South African rand fell to a nearly two-year low against the US dollar, sliding as much as 9.2%. The Chinese yuan neared its weakest level in more than a year, hitting 6.8911 to the US dollar in Hong Kong.

In bonds, the 10-year Italian yield rose above 3%, its highest in two months. In New York, the yield on the benchmark 10-year Treasury note rose to 2.884% from 2.859% on Friday. 

US dollar rises
Meanwhile, the WSJ Dollar Index rose 0.4% after its largest one-week point and percentage gain since late 2016. It measures the US dollar against a basket of 16 others.

“We don’t believe it’s the canary in the coal mine for a broader emerging-market currency crisis,”Northwestern Mutual Wealth Management chief investment strategist Brent Schutte says.  “All of this is a reminder that we’re entering a more volatile regime.”

In commodities, US crude for September fell 2.1% to $US66.21 a barrel, its lowest close since late June. Brent crude, the global benchmark, slumped 1.7% to $US71.55 a barrel. Gold fell 1.5% to $US1200 an ounce.

In corporate news, Bayer shares fell 10% after a California jury decided Monsantos Roundup, the worlds most widely used weedkiller, caused cancer. The decision will be appealed as Monsanto says scientific evidence is lacking.

Tesla shares rose 0.9% to $US359, valuing the company at $US60b after Elon Musk revealed his funding secured” announcement last week referred to  Saudi Arabia’s sovereign-wealth fund, which has a 5% shareholding.

The claim dates back two years as Mr Musk tries to quash a US Securities & Exchange Commission inquiry after he said Tesla could be taken private in $US420 a share deal that would value the company at $US70b.

Mr Musk makes his explanation in a blog post.  He and Tesla insiders together own just over 25%. Institutions own 62.2%.