World markets shuddered on Monday, as Turkey’s worsening currency crisis persuaded investors to dump equities and emerging markets and flee to safer assets such as government bonds and the dollar.
The MSCI world equity index, which tracks shares in 47 countries, was down 0.6 percent on Monday and 1.75 percent 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 Turkish President Tayyip Erdogan’s increasing control over the economy and deteriorating relations with the United States. It fell as much as 12 percent at one stage on Monday, then recovered to a loss of 8.5 percent by 1130 GMT.
“There’s a risk-off mood generally triggered by the Turkish currency sell off, and we are seeing a wider sell-off now, and it’s looking pretty ugly in other emerging markets as well,” said Investec economist Philip Shaw.
He pointed to the South African rand and the Mexican peso , down 2.8 percent and 1.8 percent respectively on Monday, as two examples of emerging markets hit by contagion.
“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.”
Turkish credit default swaps – a hedge against financial turbulence – surged to their highest since the 2008 global financial crisis as the lira took its latest dive.
The euro zone has also been hit by Turkish woes, particularly after a report by the Financial Times last week suggested the European Central Bank was increasingly concerned about euro zone banks with exposure to Turkey.
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. It hit a 10-week low to the yen around 125.45.
European stocks fell in early trade on Monday, with a pan-European index of shares down half a percent and the banking stock index as much as 2.6 percent lower.
US stock index futures fell on Monday, pointing to a lower open when Wall Street begins trading, as the lira meltdown weighed on the shares of big US lenders.
This comes after MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 1.5 percent to a near one-year low. Japan’s Nikkei lost 2.0 percent with every bourse in the region in the red.
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. Overnight, US Treasury 10-year yields also dipped to the lowest in just over three weeks at 2.85 percent.
Copper prices, meanwhile, often seen as a proxy for global economic growth, were down 1.4 percent at $6,107 a tonne.
In other commodity markets, gold was no beneficiary of safe haven flows, in fact it was lower nearly 1 percent at $1198.25 an ounce.
Oil prices edged lower, with Brent crude off 11 cents at $72.72 a barrel and US crude as much as 30 cents lower at $67.33.