A plunge in the Turkish lira rocked global equities and emerging markets on Friday and fears of more turmoil sent investors scurrying for safety in assets like the yen and U.S. government bonds.
The lira fell as much as 14 per cent against the U.S. dollar, chalking up its worst day since Turkey’s financial crisis of 2001. It came on the back of a deepening rift with the United States, worries about its own economy and lack of action from policymakers. The currency is now down more than 36 per cent this year, and 17 per cent this month alone, fanning worries about a full-blown economic crisis.
Lira one-week implied volatility spiked to a record high of over 49 while the one- and three-month equivalents both surged to their highest since late 2008, .
Bank shares across the continent fell and the euro slipped to its lowest since July 2017 as the Financial Times quoted sources as saying the European Central Bank was concerned about European lenders’ exposure to Turkey.
“You have a number of Spanish banks which effectively have very large stakes in banks operating in Turkey. If Turkey is going through economic and political turmoil - which it is - we could see non-performing loans increase there,” said David Madden, markets analyst at CMC Markets in London.
“Many of these European banks have their own non-performing loans and liquidity issues to deal with themselves. Now all of a sudden a currency crisis in Turkey could trigger another dimension to their own financial problems.”
Shares in France’s BNP Paribas, Italy’s UniCredit and Spain’s BBVA, the banks seen as most exposed to Turkey, fell over 4 per cent.
That took euro zone bank shares down 3 per cent while the pan-European STOXX 600 index fell 1 per cent.
The MSCI All-Country World index, which tracks shares in 47 countries, was also down over 0.6 per cent on the day, having erased all its gains for the week. Wall Street was set for a weak open.
Canada's main stock index opened lower on Friday, tracking global equities which tumbled following a plunge in the Turkish lira.
The Toronto Stock Exchange’s S&P/TSX Composite index was down 75.21 points, or 0.46 per cent, at 16,341.77
The Canadian dollar weakened to a more-than two-week low against its U.S. counterpart on Friday as geopolitical risk rattled global financial markets, offsetting stronger-than-expected domestic jobs data.
The Canadian dollar was trading 0.3 per cent lower at C$1.3084 to the greenback, or 76.43 U.S. cents. The currency’s strongest level of the session was C$1.3033, while it touched its weakest since July 25 at C$1.3122.
Canada unexpectedly added 54,100 jobs in July and the unemployment rate dipped to equal a record low 5.8 per cent.
“Canadian labour markets continue to generate jobs at a pretty good pace that will support growth in the economy,” said Paul Ferley, assistant chief economist at Royal Bank of Canada.
But analysts said the data were weaker than they appeared, due to a drop in full-time jobs and slower wage growth. They played down talk of another interest rate hike from the Bank of Canada as soon as next month.
U.S. stocks opened lower on Friday.
The Dow Jones Industrial Average fell 108.04 points, or 0.42 per cent, at the open to 25,401.19.
The S&P 500 opened lower by 13.94 points, or 0.49 per cent, at 2,839.64. The Nasdaq Composite dropped 57.07 points, or 0.72 per cent, to 7,834.71 at the opening bell
As investors piled into “safe” bonds, German yields hit three-week lows and yields on U.S. 10-year Treasuries fell to 2.8967 per cent.
Investors are now awaiting the release of U.S. consumer price inflation data for July for clues on the interest rate outlook and to gauge if new import tariffs were starting to have an impact. The data is expected to show inflation increased 0.2 percent, after rising 0.1 per cent in June.
The Australian dollar, often viewed as a gauge of global risk appetite due to its reliance on commodities, was the biggest faller among developed currencies, at one point down 1 per cent on the day. Going in the opposite direction was the safe-haven Japanese yen, which hit a one-month high against the dollar.
The dollar index, which measures the greenback’s strength against a group of six major currencies, breached 96, taking it to its highest level since July 2017. It was last up half a per cent at 95.986.
Adding to emerging market currency woes was the Russian rouble, which weakened to 67.12 to the dollar. Overnight it had retreated to its lowest since November 2016 on threats of new U.S. sanctions, weakening beyond the psychologically important 65-per-dollar threshold.
“Other EM currencies have held their ground against the dollar, having generally been weakening previously,” said analysts at Capital Economics.
“In most cases though, we suspect that this resilience will prove temporary,” they said, highlighting expectations of rising U.S. interest rates and worries over growing U.S. protectionism.
In commodities, U.S. crude oil rose half a per cent to $67.16 a barrel, while Brent crude was 0.6 per cent stronger at $72.47 per barrel.
Spot gold rose 0.1 per cent to $1,213 per ounce.