Thursday 27 November 2014

Asia enjoys relief rally as Turkey takes bold interest rate step

Published 29/01/2014 | 08:00

Turkey's central bank governor Erdem Basci speaks in Ankara before the bank announced it was raising the key interest rate (AP)
Turkey's central bank governor Erdem Basci speaks in Ankara before the bank announced it was raising the key interest rate (AP)

Asian markets rallied today after Turkey stunned investors with a huge hike in interest rates, stirring hopes drastic action would short-circuit a vicious cycle of selling in emerging markets and revive risk appetite.

"The major bourses are facing some solid gains at the open, with the momentum from Asian trade set to continue," IG market strategist Stan Shamu said in a note to clients.

Later in the session, the improved mood will face an test from the U.S. Federal Reserve, which is widely expected to trim its asset buying program by another $10bn a month at the conclusion of its two-day policy meeting.

But the relief was enough to lift Japan's Nikkei 2.7 percent .N225 and S&P 500 e-mini futures 0.5pc, while traditional safe havens such as the yen, bonds and gold all eased.

MSCI's broadest index of Asia-Pacific shares outside Japan.

Turkey followed India by tightening policy at a midnight meeting of its central bank, with a huge hike of 425 basis points taking the overnight lending rate all the way to 12 percent.

"Desperate times call for desperate measures, this is a confidence-saving measure," said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York.

"It will definitely hurt but it might be enough to stem the bleeding. It looks like the lira acted positively, whether it lasts is anyone's question."

Early signs were that it might be enough to stem the rout in the Turkish lira, which surged by the most in five years to reach 2.1650 per dollar from Monday's historic low of 2.39. Turnover was exceptionally strong in Asia, where the currency is rarely traded.

More emerging market central banks are expected to take steps to quell a mix of inflationary pressures at home and a flight of capital abroad. South Africa's central bank also holds its policy meeting later on Wednesday.

FED STILL AHEAD

Just the prospect of action had helped stabilize stock markets across the globe after several days of hectic selling. The MSCI emerging equity index .MSCIEF climbed 1.1 percent from a 4-1/2 month low.

On Wall Street, the Dow .DJI ended Tuesday with gains of 0.57pc, while the S&P 500 .SPX rose 0.61pc.

The calmer tone was reflected in the market's favored measure of volatility, the VIX index, which .VIX dropped over 9pc on Tuesday to 15.80 and off a peak of 18.99.

Currencies leveraged to commodity prices and global economic growth benefited from the better mood. Also helping was surprising strength in industrial production in South Korea - an antidote to recent softness in Chinese data.

The Australian dollar rose more than a third of a U.S. cent to $0.8825 in the wake of the news from Turkey. The Aussie is often used as a proxy for hedging against stress in less liquid emerging markets.

Currencies from Malaysia to Indonesia and India all gained, while the South Korean won boasted its biggest daily rise in four months.

Going the other way, the safe-haven yen gave up some of its recent gains as the dollar advanced about 0.4pc on the day to 103.31 yen from a seven-week trough of 101.71 touched at the start of the week.

Emerging markets could still be vulnerable to whatever the Fed decides on policy. The reduction of U.S. stimulus, combined with the resulting higher bond yields, is one reason funds have been switching money back to the developed world.

Yet many investors seem to have made peace with a steady pullback in asset-buying, given it is balanced with a commitment to keeping rates near zero for a long time to come.

Benchmark 10-year Treasury yields, for instance, have steadied around 2.78pc, compared to a peak of 3.04pc at the start of the month.

 

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