© Reuters. FILE PHOTO: Turkish Lira banknotes can be seen in this image
Posted by Wayne Cole
SYDNEY (Reuters) – Asian stocks were mixed and bonds rallied on Monday as a collapse in the Turkish lira sparked discussion that capital controls may be needed to stem the flight, although the impact has been relatively cautious at the moment.
The dollar was 8.0520 almost 12% higher than the lira. This was the strongest move since August 2018, when Turkish markets were in another of their periodic crises.
The decline came after President Tayyip Erdogan shocked the markets by replacing the Hawk central bank governor of Turkey with a critic of high interest rates.
"The authorities have two options: either they commit to using the interest rates to stabilize the markets, or they carry out capital controls," said Per Hammarlund, senior EM strategist at SEB Research.
"Given President Erdogan's increasingly authoritarian approach, capital controls seem the most likely choice."
Uncertainty decreased 1.6%, partly due to speculation. Japanese retail investors could suffer losses on large long positions in the high yield lira.
The waves were more modest elsewhere, as MSCI's broadest index for stocks in the Asia-Pacific region outside Japan actually added 0.3%, helped by a 0.7% rise in China's blue chips.
EUROSTOXX 50 futures were down 0.3% and futures by 0.2%. The Nasdaq futures firmed 0.6% as they fluctuated on either side of the apartment.
Yields were down five basis points to 1.68%, suggesting some preferred safe havens.
Investors are still struggling to cope with the recent surge in US bond yields, which has made stock valuations look stretched for some sectors, particularly technology.
Bonds had another wobble on Friday when the Federal Reserve decided not to renew a capital concession for banks, which could reduce their demand for government bonds.
However, the damage was limited by the Fed's promise to work on the rules to prevent strains on the financial system.
A number of Fed officials are speaking this week, including three appearances by Chairman Jerome Powell, which provide ample opportunity for more volatility in the markets.
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The fall of the lira on Monday resulted in modest yen development with notable gains against the euro and the Australian dollar. This in turn pushed the euro down slightly against the dollar to USD 1.1890.
After an initial slip, the dollar soon stabilized at 108.80 yen while the dollar fell slightly at 91.973.
The yen was also supported by concerns that Japanese retail investors who have built long lira positions, a popular trade for the yield-hungry sector, could be squeezed out and trigger another round of lira selling.
Still, Citi analysts doubted the episode would result in widespread pressure on emerging markets. The last time the lira slipped in 2020, there was little impact.
"In terms of the impact on other parts of high-yield EM, we believe this will be pretty limited," Citi said in a note.
There was little evidence of safe haven gold demand, which fell 0.2% to $ 1,741 an ounce.
Oil prices fell again after falling nearly 7% last week as concerns over global demand led speculators to take profits on long positions after a long bull run. (OR)
32 cents at $ 64.21 a barrel, while in May it fell 33 cents to $ 61.10.