Turkish lira slide continues to pull down markets

S&P TSX AND U.S. STOCK INDEXES DOWN AS ECONOMIC INSTABILITY CONTINUES TO WEIGH GLOBALLY

Turkey’s currency fell to another record low Monday, hitting stocks in North America, Europe and Asia and raising fears that the country is on the verge of an economic meltdown that could spread to other emerging markets.

The crisis, caused by soaring inflation, economic mismanagement by the Turkish government and tensions with the United States, has raised concerns over whether emerging economies that have benefited in recent years from foreign investment may also be vulnerable.

Rising interest rates in the United States and in Europe have made investors less tolerant of emerging markets. Foreign investors piled money into Turkish assets for years, lured by what appeared to be a stable economy and higher returns. But as interest rates rise in countries seen as safer, the relative attractiveness of riskier investments wanes. A crisis like the one in Turkey may be all it takes to send them fleeing.

Canada’s main stock index closed in the red Monday along with U.S. markets as concerns about economic instability in Turkey continued to weigh globally.

“The clear headliner today that’s sapping a bit of the optimism in the markets is worries about what’s happening in Turkey and the plunge in their currency,” said Craig Fehr, a Canadian markets strategist with Edward Jones in St. Louis.

Markets were rattled late last week as concerns over the country’s monetary policy debt levels, and a dispute with the U.S. sent the Turkish lira sharply down.

The instability in the country has raised concerns cracks are showing in the global landscape, but Fehr said the country’s credit system isn’t integrated enough into the global credit system to cause major shocks.

“While there can be some pain from the drop in the currency, and some pain from any potential debt challenges there, I don’t view this as a catalyst that would spark contagion in global markets.”

On Monday Turkey’s central bank announced measures to help the country’s banks manage their liquidity, but the Turkish lira and Turkey’s stock market continued to slide.

North American markets had turned slightly positive on news of the action but ended down on the day.

The S&P/TSX composite index closed down 75.76 points at 16,250.75. The index hit an intraday high of 16,371.81 points while volume on the index totalled 169.2 million.

In New York, the Dow Jones industrial average ended down 125.44 points at 25,187.70. The S&P 500 index closed down 11.35 points at 2,821.93, while the Nasdaq composite was down 19.40 points at 7,819.71.

Stock markets across Asia, including in Hong Kong; Seoul, South Korea; Shanghai; and Tokyo, fell Monday, with many exchanges dropping nearly two per cent during the day. European markets fared only slightly better.

“Turkey’s woes can ripple out to hammer European Union institutions,” Carl Weinberg, chief international economist at High Frequency Economics in White Plains, New York, said in a note to clients Monday.

Shares of European banks suffered some of the biggest losses, including BBVA of Spain and Unicredit of Italy, which have large holdings in Turkey, and lenders such as Commerzbank and Deutsche Bank, which do not have major operations there.

Investors were driven principally by fears of contagion, the notion that an economic or financial crisis in one country — in this case, Turkey — can quickly spread to other regions.

Problems in Turkey have been brewing for years, but Turkish assets have fallen steeply in recent days as questions have mounted over the country’s prospects. Price increases have quickened and President Recep Tayyip Erdogan had undertaken increasingly authoritarian moves, from the appointment of a relative as an important minister to the erosion of the central bank’s independence.

Normally, a country in Turkey’s situation would raise interest rates to stifle inflation and stop the currency’s slide. But Erdogan’s popularity has hinged on rapid growth fuelled by credit and he has often spoken against raising interest rates.

Still, Turkey has political and economic problems not found elsewhere, and analysts were not yet ready to predict widespread panic.

“In the very short term, we are seeing what we would describe as ‘risk off ’ toward emerging markets,” said Stuart Culverhouse, global head of macro and fixed income research at Exotix Capital, a research firm in London.