European stock markets were hit by currency concerns yesterday, as Russian rouble sank to hover near its lowest level in nearly two years and the Turkish lira hit a new all-time low against the US dollar, reflecting rising geopolitical tensions.
The Lira lost more than 5% yesterday, and the currency has fallen 32% year to date.
The US is the cause of these latest woes, imposing new sanctions on Russia over the poisoning of former Russian spy Sergei Skripal and following those imposed on Turkey last week.
Turkish President Recep Tayyip Erdogan called the US sanctions on the country “economic war” – after the US froze the assets of two of Turkey’s key politicians. The two nations are at loggerheads over their opposing stance on Syria and Turkey’s detention of American pastor Andrew Brunson on grounds of terrorism.
“While the broad emerging markets asset class has staged a modest recovery, recent idiosyncratic developments have sent Turkey into a tailspin,” says BlueBay Asset Management’s Mark Dowding.
“Last month, the Central Bank of Turkey refused to raise its interest rate despite mounting inflation and a growing current account deficit. Lack of action from the Bank confirmed the market's worst fear that the central bank is indeed losing its independence; Erdogan calling interest rates ‘the mother of all evil’ a while ago had already put Turkey on shaky ground.”
But State Street’s Dwyfor Evans warns that economic data suggests a slowdown in growth, which may force the Bank’s hand.
“Worryingly for the central bank, if economic data in the coming months confirm a slowdown, then political pressure may mount for the central bank to ease monetary policy. Even a part reversal of May’s interest rate hikes would undermine the achievement of Turkey’s 5% inflation target,” he said.
The Turkish stock market Borsa Istanbul 100 is down 16% year to date.
Turkey Uncertainty Hits Travel Stock
It is not just Turkey’s domestic market which is feeling the brunt of geopolitical tensions. UK travel firm TUI (TUI) was among the biggest faller in the UK market yesterday, losing 8% in mid-day trading though the firm rallied in the afternoon to close down 2.5%.
The travel and tourism company backed guidance after reporting a drop in third-quarter underlying earnings before tax. Edward Park, investment director at Brooks Macdonald said the firms fall in earnings was largely impacted by foreign exchange movements.
“The recent slide in the Turkish Lira means that the company is expected to lose around €35 million on foreign exchange revaluation which is significant when the quarterly earnings were less than €200 million. With the current political uncertainty in Turkey investors being reminded of the importance of the country to TUI’s earnings is also likely to have weighed on sentiment.”
Chris Beauchamp, Chief Market Analyst at IG said the firm had shed nearly a tenth of its value thanks to higher costs relating to Turkey and “the ongoing currency crisis in this emerging market”.
