Turkish troubles
Asian markets feel heat from slide of lira and weakening euro
PETALING JAYA: Joining a global sell-off, Malaysian equities took a hit while the ringgit slid to its lowest level since November, as fears climbed over a contagion from the currency crisis gripping Turkey.
The US dollar, yen and Swiss franc stood to benefit from the Turkish economic crisis as investors sought shelter in those currencies – widely considered as safe havens.
At its close yesterday, the benchmark FBM KLCI lost 22.41 points, or 1.24%, to 1,783.34.
Losers outnumbered gainers by almost four times, with 764 counters in the red against 213 counters rising, after 2.07 billion shares worth RM2.21bil changed hands.
Meanwhile, the ringgit depreciated 0.17% yesterday to end at 4.093 against the US dollar. The currency weakened to 4.098 against the greenback earlier. These were the ringgit’s weakest levels since November 2017.
According to AmBank Research, the risk of an emerging-market contagion cannot be ruled out.
“The dramatic slide of the Turkish lira against its main rivals was symptomatic of a broader theme in emerging markets. We believe countries that rely heavily on foreign, mostly US dollar-denominated debt, will face strong pressure from a strengthening greenback, which has been on an upswing since April,” the brokerage said.
AmBank Research said there was a correlation between the ringgit and the lira.
It noted that for every 1% drop in the lira, the drag on the ringgit would be about 0.04% on an immediate note, and 0.01% lag one period, suggesting a combined effect on average of around 0.025%. Over a longer period, the impact on the ringgit would be about 0.18%.
Hence, the brokerage wrote in its report, the ringgit would remain vulnerable due to the risk-off sentiment in the global markets following the rout in the Turkish lira.
Losses in the lira were pared in early European trading yesterday after Turkey’s central bank announced a list of measures, including cutting banks’ reserve requirements to boost liquidity as well as to support the financial stability and proper functioning of markets.
The lira sank to a record low against the US dollar last week after US President Donald Trump imposed new economic sanctions on Turkey by doubling tariffs on imported Turkish steel to 50% and aluminium to 20%.
Amid the financial turmoil, the US dollar continued to strengthen against global currencies, with the US dollar index surging to a 14-month high of 1,195.27 at press time.
In a note to investors, Maybank’s Singapore-based head of foreign-exchange research Saktiandi Supaat said heightened uncertainties were weighing on sentiment towards emerging markets.
“An extra layer of complexity has been added to the current environment. The markets now not only have to deal with global trade tensions, but also geopolitical tensions triggered by the sell-off in the Turkish lira and Russian ruble due to US trade sanctions,” Saktiandi explained.
“Should these concerns continue to feed into sentiment, we could see a further sell-off in selected currencies in Asia (except Japan), particularly the Indonesian rupiah and Philippine peso due to their perceived vulnerability because of their twin deficits,” he added.
Saktiandi noted that beneficiaries in the current environment could be the US dollar and the yen, due not only to some safe-haven proxy play, but also to the narrowing spreads between the 10-year US Treasury and the Japanese government bond yields.
Jameel Ahmad, global head of currency strategy and market research at FXTM, concurred, saying: “Due to the uncertain nature of both geopolitical and political risks, which are remaining rampant themes across global headlines, it is difficult to foresee when the current investor mindset towards taking on “risk” would actually change.
“This means that we can expect a prolonged mixed sentiment towards global stocks, low attraction towards emerging-market currencies but a stronger US dollar and Japanese yen,” he explained.
One thing seemed consistent: for currency traders, they remained positive on the US dollar, Jameel said.
“Asian markets and forex rates are likely to remain under threat from the Turkey risks and prolonged US dollar strength story,” Jameel said.
“If investors continue to be concerned about the events in Turkey, and they would be likely, we could see more pain in store when it comes to risk appetite in the week ahead,” he added.
According to OCBC Treasury Research analyst Terence Wu, the impact of Turkey on the emerging Asian currencies would come through in a stronger US dollar.
“At this juncture, we do not expect the derisking across global emerging markets to hit emerging Asian assets in an outsized way,” he wrote in his report.
“Nevertheless, expect the Asian Currency Index to push higher early week, although to a more moderated extent compared with other emerging-market currencies,” he added.
According to RHB Research, the ringgit is expected to face some weakness over the near term due to risks associated with the stronger US dollar, the trade war and domes-
tic policy uncertainty.
The brokerage expected the ringgit to weaken to 4.10 against the US dollar by the end of 2018, and potentially overshoot on the downside, although it would unlikely be too severe, as the country continues to enjoy a current account surplus.
Meanwhile, Kenanga Research head Chan Ken Yew said while the currency crisis in Turkey did trigger the volatility in financial markets, the local stock market was probably already overdue for a pullback.
“With or without the crisis in Turkey, technical signs already showed that the local stock market was due for a correction, as it had entered the ‘overbought’ territory since last week,” Chan told StarBiz.
Further downside to the local equity market was expected, with the FBM KLCI likely sliding to 1,760 points in the short term.
Chan said investor sentiment should remain cautious on external developments, especially with all the uncertainties arising from escalating trade tensions between the United States and several other countries, including Turkey.
“On the domestic side, investors are likely to look to corporate earnings as we enter the results season, as well as the upcoming supplementary budget by the new government for fresh catalysts,” he noted.
Bank Negara is set to announce Malaysia’s second-quarter gross domestic product (GDP) performance on Thursday.
Some economists expected the numbers to show a slight moderation in growth, particularly after the disappointing industrial production index result, which grew at its slowest pace in four years at 1.1% year-on-year (y-o-y) in June.
Nomura Research expected the country’s GDP growth to slow to 4.7% y-o-y in the second quarter, while Standard Chartered expected it to be at 5.2% y-o-y compared with growth of 5.4% in the first quarter.