Stocks and Forex Ride out Turkey Shock

Indexes tracking Europe’s 600 largest stocks, emerging-market shares, and emerging-market currencies all stayed near flat as investors bet contagion would be for now limited.

Erdogan’s third ousting of a central bank governor since 2019 mostly affected domestic assets.

The lira fell 15% to 8.485 against the dollar, its worst plunge since the last Turkish crisis of 2018, before the currency recovered on calming words from Finance Minister Lutfi Elvan.

By 1217 GMT, the currency traded at 7.927 after Elvan said Turkey would stick to free-market rules, damping down fears of currency controls.

“We don’t see any contagion risk to the rest of emerging markets, it’s been shown time and time again that the lira is its own story,” said John Hardy, head of foreign exchange strategy at Saxo Bank.

Turkish sovereign bond yields soared above 18%, hitting a 22-month high.

Euro zone banks exposed to the country such as Spain’s BBVA , Italy’s UniCredit, France’s BNP Paribas , and Dutch bank ING fell between 1.6% and 6%.

The ripples were more modest elsewhere. U.S. stock futures were up while yields on 10-year Treasury notes edged down five basis points to 1.68%, suggesting some investors favoured safe havens.

Futures tracking the S&P 500 and the Nasdaq rose, with heavyweight technology stocks set to rebound after a surge in bond yields in recent weeks sparked a flight from richly valued equities.

Bonds had another wobble on Friday when the Federal Reserve decided not to extend a capital concession for banks, which could lessen their demand for Treasuries.

The damage was limited, however, by the Fed’s promise to work on the rules to prevent strains in the financial system.

A host of Fed officials speak this week, including three appearances by Chair Jerome Powell, providing plenty of opportunity for more volatility in markets.

SHORTS UNWIND

The rising U.S. bond yields and crumbling lira supported the dollar’s appeal as a safe haven, prompting hedge funds to cut bearish positions.

The yen likewise strengthened, with notable gains on the euro and Australian dollar.

After an initial slip, the dollar steadied at 108.80 yen . The dollar index was down slightly at 91.942.

Also supporting the yen were concerns that Japanese retail investors who have built long lira positions, a popular trade for the yield-hungry sector, might be squeezed out and trigger another round of lira selling.

Analysts at Citi doubted that the episode would lead to widespread pressure on emerging markets, noting the last time the lira slid in 2020, there was little spillover.

“In terms of impact on other parts of the high-yielding EM, we believe that will be quite limited,” Citi said in a note.

There was scant sign of safe-haven demand for gold, which eased 0.65% to $1,734 an ounce.

Oil prices steadied after a broad sell-off last week as market players remained confident demand would rebound later in the year, despite European coronavirus lockdowns dimming hopes for a quick economic recovery.

Brent crude was up 2 cents at $64.57 a barrel by 1201 GMT and U.S. oil was up 13 cents, or 0.2%, at $61.55. Both contracts fell more than 6% last week after making steady gains for months.