Canadian and U.S. markets are set for a lower open Monday after Turkey’s worsening currency crisis heightened investor concern and they dumped equities and emerging market shares and fled to safer assets such as government bonds and the U.S. dollar.
Investors fear the selloff in the lira, which hit a fresh record low overnight, could have a ripple effect in global financial markets, with the euro, South Africa’s rand and Mexico’s peso already dented by Turkey’s crisis.
The lira pared some of its losses against the dollar after the central bank said it had lowered reserve requirement ratios for banks as well as pledged to provide whatever liquidity banks needed and to take all necessary measures to maintain financial stability.
However, the Turkish currency was still down more than 6 per cent on the day and within spitting distance of a record low around 7.24 hit it early Asian trade. The lira has weakened nearly 45 per cent since the start of the year.
The Turkish lira has tumbled on worries over Turkish President Tayyip Erdogan’s increasing control over the economy and deteriorating relations with the United States.
“The plunge in the lira, which began in May, now looks certain to push the Turkish economy into recession and it may well trigger a banking crisis,” said Andrew Kenningham, chief global economist at Capital Economics.
“This would be another blow for EMs as an asset class, but the wider economic spillovers should be fairly modest, even for the euro zone,” he added.
In Europe, Britain’s FTSE was down 0.5 per cent, Germany’s DAX was off 0.64 per cent and France’s CAC fell 0.33 per cent.
Asian shares were a sea of red as investors fled to safer assets such as the dollar, Swiss franc and yen.
China’s blue chip index shed 1.5 per cent, while Hong Kong stocks lost 1.6 per cent as the local dollar fell to the limits of its trading band.
The Nikkei dropped nearly 2 per cent, Shanghai’s index fell 0.32 per cent and the Hong Kong’s Hang Seng fell 1.5 per cent.
Oil prices slipped on Monday as trade tensions and troubled emerging markets dented the outlook for fuel demand, though U.S. sanctions against Iran pointed towards tighter supply ahead.
Turkey’s financial crisis has raised the risk of contagion throughout emerging economies, dragging down South Africa’s rand, Argentina and Mexico’s pesos as well as the Russian rouble. It has also dented emerging market stocks while curbing growth and the outlook for oil demand.
This is compounding worries that a deepening trade war between the United States, China and the European Union will squeeze business activity in the world’s biggest economies.
“Trade protectionism and escalating tensions between the world’s largest economies (the United States and China) have cast a looming shadow on global oil demand growth in 2018,” brokerage Phillip Futures said on Monday.
Hedge funds and other money managers reduced their bullish positions in U.S. crude futures and options in the week ending Aug. 7, data from the U.S. Commodity Futures Trading Commission showed on Friday.
Gold prices extended declines into a third session on Monday, as the U.S. dollar climbed to a 13-month high against major peers amid financial crisis in Turkey.
The U.S. dollar rose against China’s yuan on Monday and held steady after hitting a 13-month high against a basket of six major currencies.
“In an environment of broad dollar strength, gold struggles ... but what we clearly see is some support and that comes from uncertainty as equities are negatively affected,” said Dominic Schnider at UBS Wealth Management in Hong Kong.
In other precious metals, silver was little changed at US$15.27 an ounce, after earlier slipping to the lowest since July 19 at US$15.19. Platinum shed 1 per cent to US$819.40, while palladium lost 1.2 per cent to US$899.50.
Currencies and bonds
The Canadian dollar fell slightly, dipping below the 76-cent US mark in early trading, sideswiped by the turmoil in Turkey.
The U.S. dollar, which has rallied since the lira crisis exploded, gained 0.1 per cent to 96.463 against a basket of major currencies.
The euro fell to as low as US$1.1365, a 13-month low, before recovering to trade down 0.3 per cent to US$1.1377.
Analysts said most of the euro weakness was down to dollar strength but worries about the impact on European banks of the Turkish slump, despite the relatively limited exposure of most big lenders, had also played a role.
Stocks to watch
U.S. regulators, concerned about the forced departures of Hydro One Ltd. chief executive Mayo Schmidt and the company’s board in July, are now questioning whether the utility will try to make up for a possible decline in Ontario revenue by raising rates for customers of Avista Corp. The public utility commission in Washington state, where Avista serves just less than 400,000 gas and electric customers, is evaluating the protections Hydro One agreed to earlier this year in order to get its acquisition of Avista approved.
U.S. President Donald Trump backed boycotting American motorcycle manufacturer Harley-Davidson Inc. on Sunday, the latest salvo in a dispute between the company and Mr. Trump over tariffs on steel. The Wisconsin-based motorcycle manufacturer announced a plan earlier this year to move production of motorcycles for the European Union from the United States to its overseas facilities to avoid the tariffs imposed by the trading bloc in retaliation for Mr. Trump’s duties on steel and aluminum imports.
Bayer shares plunged more than 10 per cent on Monday after a California jury ordered the German company’s newly acquired Monsanto subsidiary to pay $289-million for not warning of cancer risks posed by its main weed killer. The case against Monsanto, bought by Bayer this year for $63-billion, is the first of more than 5,000 similar lawsuits over the company’s glyphosate-based weedkillers, including its Roundup brand, across the United States.
VF Corp. will spin off its denim business that houses Lee and Wrangler jeans into an independent public company, it said on Monday, seeking to sharpen its focus on more profitable brands such as Vans shoes and The North Face outdoor wear.
Earnings include: Absolute Software Corp.; Alexco Resource Corp.; Automotive Properties REIT; Badger Daylighting Ltd.; Boardwalk Real Estate Investment Trust; Cargojet Inc.; Home Capital Group Inc.; Innergex Renewable Energy Inc.; K-Bro Linen Inc.; Largo Resources Ltd.; Minto Apartment Real Estate Investment Trust; Premium Brands Holdings Corp.; Probe Metals Inc.; Sprott Inc.; The Stars Group Inc.; TMAC Resources Inc.; Viemed Healthcare Inc.; Westport Fuel Systems Inc.
No major reports expected Monday.