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Turkey’s worsening currency crisis sent world equities lower and cut into the value of emerging market stocks and currencies Monday, while boosting the prices of German bonds and other stable assets.

The MSCI world equity index, which tracks shares in 47 countries, was down 0.7 per cent and 1.7 per cent since Friday’s open as the Turkish lira plunged to a record low, forcing the country’s finance minister to announce an economic action plan to ease nerves.

The lira has tumbled on worries over President Tayyip Erdogan’s increasing control over the economy and deteriorating relations with the United States. It fell as much as 12 per cent at one stage on Monday, then recovered to a loss of 8.5 per cent.

“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.”

Emerging market stocks lost 2.11 per cent.

In Toronto, the S&P/TSX composite index lost 0.46 per cent, or 75.76 points, to 16,250.75.

Leading the declines was the materials index, which fell 2 per cent as a stronger dollar pressured gold prices in the backdrop of a plunging Turkish lira.

Also weighing on the materials index were shares of First Majestic Silver Corp., which fell 14.9 per cent after the miner reported a larger-than-expected loss in the second quarter.

In the United States, new record highs for Apple Inc. and Amazon.com Inc. were not enough to outweigh declines in financial companies that are the most likely to be affected by the steep decline in the lira.

“The global financial system is so interconnected that we tend to think of them as a group and financials come under pressure,” said Art Hogan, chief market strategist at B. Riley FBR in New York.

All three major U.S. indexes closed lower, with the S&P 500 and the Dow falling for the fourth day in a row.

The Dow Jones Industrial Average fell 125.64 points, or 0.5 per cent, to 25,187.5, the S&P 500 lost 11.34 points, or 0.40 per cent, to 2,821.94 and the Nasdaq Composite dropped 19.40 points, or 0.25 per cent, to 7,819.71.

The euro fell to a one-year low against the dollar on Monday and sank to a one-year trough against the Swiss franc as well.

European stocks fell on Monday, with a pan-European index of shares down 0.3 per cent and the banking stock index as much as 2.6 per cent lower.

The pan-European FTSEurofirst 300 index lost 0.31 per cent.

Safe-haven government bonds were in demand, with yields on German 10-year debt, the benchmark for the euro zone, dropping to a one-month low.

Benchmark 10-year notes last fell 4/32 in price to yield 2.8714 per cent, from 2.859 per cent late on Friday.

Spot gold dropped 1.5 percent to $1,192.43 an ounce. U.S. gold futures fell 1.59 percent to $1,199.60 an ounce.

Oil prices fell on Monday after data suggested inventories at the U.S. crude delivery hub rose in the latest week, compounding worries that troubled emerging markets and trade tensions will dent the outlook for fuel demand.

Brent crude futures dipped 20 cents, or 0.3 per cent, to settle at $72.61 a barrel, while U.S. West Texas Intermediate (WTI) crude declined 43 cents to settle at $67.20 a barrel, with a 0.7-per-cent loss.

Prices fell earlier in the session by more than $1 a barrel after inventories at the Cushing, Okla., delivery hub for WTI rose by about 1.7 million barrels in the week through Aug. 10, traders said, citing data from market intelligence firm Genscape.

Crude inventories at Cushing have been dwindling, in part due to an outage at an oil processing facility in Canada that has reduced the flow of crude into the hub. The Canadian Syncrude processing facility has begun ramping up light oil production and was expected to return to full production in September.

“Cushing may finally start to replenish from critically low inventory levels,” said John Kilduff, a partner at Again Capital Management in New York.

Turkey’s financial crisis has raised the risk of contagion throughout emerging economies, dragging down South Africa’s rand, Argentina and Mexico’s pesos and the Russian rouble. It has also dented emerging market stocks while curbing growth and the outlook for oil demand.

That 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.

Reuters

Turkey is a relatively small oil consumer, accounting for less than 1 million barrels per day (bpd), or around 1 percent of global demand. However, contagion concerns are prompting risk-off sentiment, Jim Ritterbusch, president of Ritterbusch and Associates, said in a note.

“The energy complex is being increasingly jostled by fresh daily headlines that don’t necessarily have much effect on current supply or demand on a short term basis but could dramatically affect oil balances when looking down the road just a few months,” he said.

The Organization of the Petroleum Exporting Countries forecast lower demand for its crude next year as rivals pump more and said top oil exporter Saudi Arabia, eager to avoid a return of oversupply, had cut production.

In a monthly report, OPEC said the world will need 32.05 million bpd of crude from its 15 members in 2019, down 130,000 bpd from last month’s forecast.

U.S. oil production from seven major shale basins was expected to rise 93,000 bpd in September to 7.52 million bpd, the U.S. Energy Information Administration (EIA) said.

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