Turkey’s lira recouped some of its losses as the country’s central bank took steps to stem the currency’s freefall, while Asian shares were a sea of red as investors fled to safer assets such as the dollar, Swiss franc and yen.
The run from risk dragged MSCI’s broadest index of Asia-Pacific shares outside Japan down 1.5 percent to a near one-year low. Japan’s Nikkei lost 2.0 percent with every bourse in the region in the red.
EMini futures for the S&P 500 were off 0.3 percent, while 10-year Treasury yields dipped further to 2.85 percent. Spread-betters pointed to a subdued start for European shares with London’s FTSE futures down 0.4 percent.
China’s blue chip index shed 0.7 percent, while Hong Kong stocks lost 1.5 percent as the local dollar fell to the limits of its trading band.
Much of the action was in currencies with the euro gapping lower as the Turkish lira took another slide to all-time lows around 7.2400.
The lira did find a sliver of support when Turkey’s central bank said it had lowered reserve requirement ratios for banks. It also said it would take all necessary measures to maintain financial stability.
Also helping was Turkish Finance Minister Berat Albayrak’s comments that the country had drafted an action plan to ease investor concerns, while the banking watchdog said it limited swap transactions.
Yet the dollar was still up more than 9 percent on the day at 6.9743 lira. This time last month it was at 4.8450. The currency has tumbled on worries over Turkish President Tayyip Erdogan’s increasing control over the economy and over deteriorating relations with the United States.
“The plunge in the lira, which began in May, now looks certain to push the Turkish economy into recession and it may well trigger a banking crisis,” said Andrew Kenningham, chief global economist at Capital Economics.
“This would be another blow for EMs as an asset class, but the wider economic spillovers should be fairly modest, even for the euro zone,” he added.
Kenningham noted Turkey’s annual gross domestic product of around $900 billion was just 1 percent of the global economy and slightly smaller than the Netherland’s.
The Turkish equity market was less than 2 percent of the size of the U.K. market, and only 20 percent was held by nonresidents, he added.
“Nonetheless, Turkey’s troubles are a further headwind for the euro and are not good news for EM assets either.”
Indeed, the single currency sank to a one-year trough against the Swiss franc around 1.1300 francs, while hitting a 10-week low on the yen around 125.45.
Against the U.S. dollar, the euro touched its lowest since July 2017 at $1.13700. It was last at $1.1398 and still a long way from last week’s top at $1.1628.
The dollar eased against the safe haven yen to 110.31 , and was relatively flat against a basket of currencies at 96.338.
The Argentine peso and South African rand were also caught in the crossfire, with the dollar adding 4 percent on the rand. Dealers said Japanese retail investors had been squeezed out of long positions in the rand sending the yen steaming higher.
“Contagion risks center on Spanish, Italian and French banks exposed to Turkish foreign currency debt, as well as Argentina and South Africa,” warned analysts at ANZ.
“Turkey’s massive pile of corporate debt denominated in foreign currencies, but a rapidly sliding currency – and inflation that’s threatening to go exponential – is a toxic combination.”
In commodity markets, gold found little in the way of safety flows and was last down at $1,209.4 an ounce.
Oil prices were mixed with Brent off 23 cents at $72.58 a barrel, while U.S. crude dipped 1 cents to $67.62.