Emerging stocks were left clinging to slimmest of weekly gains yesterday, as trouble in Turkey, a 3% drop in oil and a fifth week of gains for the dollar all took their toll on the sector’s recent hot streak.
Investors have dumped Turkish assets following last Friday’s failed coup and a crackdown by President Tayyip Erdogan, who has imposed a three-month state of emergency.
Turkish stocks were set for their worst week since late 2008, dropping half a per cent yesterday and having lost 14% since the coup attempt.
The dollar-denominated MSCI Turkey index is now 4% down on the year.
The lira was flat around 3.07 to the dollar, near record lows and is down 1.7% for the week.
Cristian Maggio, head of EM strategy at TD Securities, predicted the lira would fall further, with the bond market pivotol following a downgrade of the sovereign rating by S&P Global this week.
“With the risk of further downgrades, this sector will be under pressure, which will likely trigger big outflows and put more pressure on the currency,” Maggio said.
The yield premium paid by Turkish sovereign bonds over US Treasuries on the JP Morgan EMBI Global index has widened 66 basis points since last Friday to 336 bps, blowing out to the widest since mid-February on Thursday.
Maggio said the developments in Turkey were a “game changer” as a lot of investors would be deterred from getting involved.
“As the macroeconomic environment deteriorates — and it will deteriorate as that is an unavoidable consquence of falling foreign direct investment and tourism — you will see more reluctance to invest in Turkish securities,” he said.
Minor falls overnight for the majority of Asian markets and a soft end to an otherwise solid week in eastern Europe pushed MSCI’s benchmark emerging equity index down 0.3% for only its second day out of the last 12 in the red.
Warsaw stocks were amongst the biggest fallers in Europe, down around 1%, with Budapest shares down 0.7% and Russian dollar-denominated stocks down 0.7%.
A fall in oil prices over the last two sessions was also weighing on some EM oil producers.
The rouble slipped 0.9% against the dollar and the Malaysian ringgit hit three-week lows, facing the biggest weekly loss in 10 months amid a deepening scandal surrounding state fund 1MDB.
China’s yuan was set for its biggest weekly gain since April, however.
State-run banks were suspected of supporting it ahead of this weekend’s G20 meeting.
Data from the Bank of International Settlements showed cross-border credit to China from international banks contracted by a massive $63bn in the second quarter, accounting for most of the $76bn decline in emerging markets cross-border credit in this period.
There seemed to be little spillover from Turkey, with yield-hungry investors still snapping up emerging assets.
Emerging bond funds enjoyed record high weekly inflows of $4.7bn, and combined equity and debt inflows were the second highest on record, JPMorgan said.