Global markets and news headlines across the world are once again being completely dictated by the ongoing events in Turkey. The Turkish Lira has entered another round of currency freefall, with the ongoing volatility dragging down a wide host of currencies across the world. The currency weakness spread to hit the South African Rand, Russian Ruble and Mexican Peso while the Indian Rupee dropped to a new all-time low as a result of the “risk off” atmosphere across global markets.
The damage across the global markets has been far and wide following the Lira’s freefall, but it is the emerging market currencies and higher-yielding assets that are up there as contenders to suffer the most from crippling investor attraction towards taking on risk. Some emerging market currencies are still not used to the type of market volatility that developed currencies can face, with some speculation already brewing that emerging market central banks might step in to prevent further respective currency weakness. I fear that because the markets are being driven by “animal spirits” stemming from external headwinds, there is very little these central banks can do and it would risk concerning investors even further if they start pushing the “panic” button.
Simply put, for as long as investor sentiment remains driven by intense fears that Turkey is in the midst of a currency crisis that the trend will remain “risk off”. This means that global stocks will struggle to find buyers, while emerging market stock markets and its respective currencies will suffer from diminished investor attraction towards risk.
Both the Japanese Yen and US Dollar are likely to remain supported due to their safe-haven status.
The Euro fell to a fresh 2018 low against the US Dollar in the early hours of weekly trade, following another astonishing collapse in the Turkish Lira when Asian markets opened this morning. Concerns remain that Europe is more exposed to a Turkish crisis than investors have priced into the market. Europe is just one of the markets that is at threat to a contagion knock-on effect from a Turkish Lira crisis.
