World stocks hit one-month low as Turkish rout spreads

LONDON: World markets shuddered yesterday, as Turkey’s worsening currency crisis persuaded investors to dump equities and emerging markets and flee to safer assets such as government bonds and the dollar. The MSCI world equity index, which tracks shares in 47 countries, was down 0.6 percent yesterday and 1.75 percent since Friday’s open as the Turkish lira plunged to a record low, forcing the country’s finance minister to announce an economic action plan to ease nerves.

The lira has tumbled on worries over Turkish President Tayyip Erdogan’s increasing control over the economy and deteriorating relations with the United States. It fell as much as 12 percent at one stage yesterday, then recovered to a loss of 8.5 percent by 1130 GMT.

“There’s a risk-off mood generally triggered by the Turkish currency sell off, and we are seeing a wider sell-off now, and it’s looking pretty ugly in other emerging markets as well,” said Investec economist Philip Shaw. He pointed to the South African rand and the Mexican peso, down 2.8 percent and 1.8 percent respectively yesterday, as two examples of emerging markets hit by contagion.

“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.”

Turkish credit default swaps - a hedge against financial turbulence - surged to their highest since the 2008 global financial crisis as the lira took its latest dive.

The eurozone has also been hit by Turkish woes, particularly after a report by the Financial Times last week suggested the European Central Bank was increasingly concerned about euro zone banks with exposure to Turkey. The euro fell to a one-year low against the dollar yesterday and sank to a one-year trough against the Swiss franc as well. —