Global market rout pauses as Turkey mulls rates hike

Emerging markets steadied after three days of intense selling today, as investors waited to see if Turkey, one of the epicentres of the rout, would hike interest rates to defend its battered lira.

Investors have been shaken this week as jitters about the withdrawal of US monetary stimulus and slowing Chinese growth have amplified country-specific political turmoil from Turkey to Thailand.

Relative calm in Asia overnight meant European shares and periphery euro zone government bonds were able to claw back some recent lost ground, although with the approach of this week's Federal Reserve meeting confidence remained fragile.

Wall Street was expected to snap a three-day run of falls when trading resumes, but focus remained firmly on whether the central bank of Turkey would bow to market pressure and hike interest rates at an emergency policy meeting later.

India surprised markets earlier by doing just that, and despite its reluctance to unsettle Turkish voters ahead of elections this year, a new poll showed analysts now expect the central bank to lift rates by 225 basis points.

The Turkish lira remained volatile ahead of the decision which will be announced at midnight in Istanbul (10pm Irish time). It was trading at 2.2670 lira to the dollar, though it kept some distance from the record low of 2.3900 hit yesteray. Istanbul’s main stock market, which has lost almost 20 per cent over the last four months, also rose, climbing 1 percent at one point to help MSCI’s main emerging market index see its first gains in three sessions.

“We think there is room for the central bank to use more conventional monetary policy and that is clearly what the market expects,” said Fergus McCormick, head of sovereign ratings for rating agency

Over $1 trillion dollars has been wiped off world stocks during a week of turbulence. Slowing sales at gadget giant Apple had soured US markets late yesterday, but Asia's rebound and a rise in first quarter profits at German engineering behemoth Siemens helped European shares off near-one-month lows.

Wall Street looks set for a modest rebound today after a three-session decline on the S&P 500, but market sentiment was weighed down by an unexpected drop in durable good orders in December.

Major currencies marked time ahead of the conclusion of Fed’s two-day policy meeting tomorrow, with both the euro and the yen down slightly at $1.3650 and 103.12 yen to the dollar respectively.

Despite the market turmoil of the last week, expectations are still for the US central bank to slice another $10 billion off the $75 billion it spends each month on buying bonds to help the banking system and economy strengthen. Johannes Jooste, head of the London investment office at Julius Baer, said the reduction in US stimulus was one of the key factors behind the emerging market nervousness.

Investors poured their cash into developing economies when emergency rate cuts during the financial crisis meant US, European and other developed market bonds offered little in the way of interest. They are now pulling it back out again as the prospects of higher developed market rates re-emerge.

India’s surprise move to hike rates saw the rupee rise 0.7 per cent to 62.65 to the dollar and though Mumbai’s main stock market grumbled, benchmark 10-year Indian government borrowing costs improved a shade.

Expectations are growing that more emerging central banks will follow suit in a bid to stabilise tumbling currencies that can help exporters but also put upward pressure on inflation. Brazil, South Africa and Indonesia - some of what have been dubbed the Fragile Five economies which have a strong reliance on external capital - are main candidates. South Africa’s central bank meets tomorrow.

Reuters