Turkey’s lira fell to two-month lows yesterday as the suspension of some 12,800 police signalled a continuation of the government’s crackdown after July’s failed coup, though global equity gains allowed emerging shares to rise for a second day.
Strong US manufacturing data supported the dollar and took a toll on emerging currencies overall, with markets now pricing a US interest rate rise in December.
However, signs of positive growth momentum in the world’s largest economy boosted emerging equities, which rose 0.4%.
But the impact of positive PMI data in many countries was being offset by domestic politics within emerging markets while there are fears of spillover from Britain, where plans to start exiting European Union by March sent sterling to a three-decade low.
Political tensions have also resurfaced in Turkey where authorities have extended an emergency period and continued purging officials they say support dissident cleric Fethullah Gulen. He denies masterminding the coup attempt.
“Emerging currencies were doing well for a while, driven by the low-for-longer theme, re-flattening of (developed) yield curves and energy prices being better supported. But now we have some idiosyncratic stories linked to politics. That’s why Turkey is underperforming,” said Unicredit strategist Kiran Kowshik.
He also noted Colombia’s vote against a peace deal with Marxist rebels and the breakdown on US-Russia talks on Syria. The lira and Turkish stocks slipped 0.3% against the dollar. Emerging currencies were also hurt by the dollar which surged almost half a per cent against a basket of currencies.
The rand and rouble also weakened around 0.3%.
In India, the rupee gained 0.2% against the dollar after newly minted monetary policy committee delivered a surprise 25-basis-point cut, with governor Urjit Patel presiding over his first policy review since his appointment last month.
Stocks moved off recent one-month lows, rising 0.2% while the bank share index jumped almost 1%, shrugging off political woes amid tensions with neighbouring Pakistan which had weighed on Indian assets in recent days.
Ten-year bond yields fell 3 bps to 6.75% to new seven-year low.
Polish and Hungarian stock markets tracked gains on Western European bourses where shares in Deutsche Bank jumped 2.3% and a pan-European index rose almost 1%.
Currencies were flat however, showing little reaction to Brexit jitters despite the region’s links with Britain for jobs and remittances.
Kowshik noted that while emerging assets had sold off after the June 23 Brexit vote, they had subsequently benefited from developed central banks’ resolve to keep interest rates low.
“The important thing is whether the resulting uncertainty from a hard Brexit makes central banks keep rates lower for longer.
If that view becomes dominant, we could, strangely enough, see EM fixed income outperform,” he added.
Emerging sovereign dollar bond yield spreads narrowed one basis point to 332 bps over Treasuries, the narrowest in almost three weeks.