Turkish stocks, bonds and the lira sold off on Monday after a credit rating downgrade to junk while rising unease over US politics and a meeting of oil exporters spurred broader emerging markets weakness.
Late on Friday, Moody’s cut Turkey’s sovereign rating to ‘junk’, citing worries about the rule of law after a failed putsch and risks from a slowing economy in a move which could push up the costs of borrowing for the country.
Stocks in Istanbul dropped 4%, dollar-denominated bonds slipped across the curve while local bond yields rose into double-digit territory and the lira weakened around 1% against the dollar. The assets later recovered some of the losses. “You’ve had the coup, you have had various terrorist attacks, you have a central bank that is cutting interest rates and it is far from clear...that it should be cutting rates and then the downgrade,” said Paul Fage, senior emerging market strategist at TD Securities.
“But that said, (Turkish assets) did not get killed by any stretch of imagination and would have given investors positive returns since the start of the year, and that is a reflection of its high carry-currency and that we are still in a reasonably risk-on environment for EM.”
JPMorgan, which runs the most widely used emerging debt indexes, estimated earlier this year that a cut to junk could force funds to dump around $10bn worth of Turkish bonds with over 10% of hard currency Turkish debt at risk of forced selling
Emerging stocks also suffered.
MSCI’s index fell 1.3 % – the steepest daily loss in two weeks – as focus switched from central banks to American politics ahead of the first US presidential debate later in the day.
On currency markets Russia’s rouble was trading flat against the dollar as oil prices rose 0.5% following a 4% drop on Friday.
Opec and other big oil producers start a meeting in Algeria later in the day where they will discuss a possible output-limiting deal.
Israel’s shekel weakened 0.2% ahead of a central bank meeting where policy makers are expected to leave interest rates unchanged for the 19th straight month after data showed economic growth remains healthy even as a deflation trend persists.
In central and eastern Europe, Polish stocks led losses on bourses across the region, down 1.6% and extending losses posted since Polish Prime Minister Beata Szydlo said on Friday that she would reshuffle her government. The forint eased 0.2% to the euro, pulling back from 16-month highs amid some unease caused by a blast on the weekend in Budapest, while Hungarian stocks fell 0.7% to one-week lows.