The dollar was trading nearly 12% higher versus the lira at 8.0520, the sharpest move since August 2018
Asian stocks turned mixed and bonds rebounded on Monday as a plunge in the Turkish lira sparked talk that capital controls might be required to stem the rout, though the broader fallout was relatively restrained for the moment.
The dollar was trading nearly 12% higher versus the lira at 8.0520, the sharpest move since August 2018 when Turkish markets were in another of their periodic crises.
The slide came after President Tayyip Erdogan replaced Turkey’s hawkish central bank governor with a critic of high interest rates.
The authorities will be left with two choices, either it pledges to use interest rates to stabilise markets, or it imposes capital controls, said Per Hammarlund, senior EM strategist at SEB Research. Given the increasingly authoritarian approach that President Erdogan has taken, capital controls are looking like the most likely choice.
The uncertainty saw Japan’s Nikkei drop 1.6%, partly on speculation Japanese retail investors could face losses on large long positions in the high-yielding lira.
The ripples were more modest elsewhere with MSCI’s broadest index of Asia-Pacific shares outside Japan actually gaining 0.3%, aided by a 0.7% rise in Chinese blue chips.
EUROSTOXX 50 futures eased 0.3% and FTSE futures 0.2%. Nasdaq futures firmed 0.6%, while S&P 500 futures wobbled.
Yields on 10-year Treasury notes inched down five basis points to 1.68%, suggesting some favoured safe havens.
Investors are still struggling to deal with the recent surge in U.S. bond yields, which has left equity valuations for some sectors, particularly tech, looking stretched.
Bonds had another wobble on Friday when the Federal Reserve decided not to extend a capital concession for banks, which could lessen their demand for Treasuries.
The damage was limited, however, by the Fed’s promise to work on the rules to prevent strains in the financial system.
A host of Fed officials speak this week, including three appearances by Chair Jerome Powell, providing plenty of opportunity for more volatility in markets.