EMERGING MARKETS-Turkey's lira pressured by policy worries; Brazilian assets sink
Turkey's lira lagged most emerging-market currencies on Tuesday amid debates in the government on foreign-exchange policy, while Brazilian assets were being closely watched after outflows on fears of political interference in state-run companies. The lira fell 0.1% after posting its worst day since mid-January on Monday.Reuters | Updated: 23-02-2021 15:34 IST | Created: 23-02-2021 15:34 IST
Turkey's lira lagged most emerging-market currencies on Tuesday amid debates in the government on foreign-exchange policy, while Brazilian assets were being closely watched after outflows on fears of political interference in state-run companies.
The lira fell 0.1% after posting its worst day since mid-January on Monday. Markets showed some concern over the government's defending policies of Berat Albayrak, a former finance minister and President Tayyip Erdogan's son-in-law, that saw a sharp decline in foreign exchange reserves. Some saw that as a sign that Albayrak could make a return.
"The story that Albayrak could return in some capacity is new and one that investors will be monitoring closely," said Piotr Matys, senior FX strategist for central and eastern Europe at Rabobank. But he added that the main source of support, such as high interest rates and commitment to maintaining tight monetary policy, remain intact, and the day's move could be a correction after the lira's impressive run over the past few months.
In Brazil, news that President Jair Bolsonaro fired the head of state-run oil company Petrobras roiled markets. Investors took the move as a sign that some of Bolsonaro's market-friendly initiatives may be rolled back. Brazilian markets had their worst day since the autumn. The Bovespa index lost almost 5% with state-run companies leading the declines. Petrobras finished the day down 21%.
"Bolsonaro is clearly adopting many of the populist policies of the past. And because of the growing uncertainty triggered by Bolsonaro's latest moves, a 50bp rate hike is now our base case for March," said analysts at TS Lombard. MSCI's index of emerging market shares was flat on Tuesday, giving back some gains as mainland China stocks ended lower. Currencies rose 0.1% after a sell-off the day before, when rising U.S. bond yields pressured risk assets.
Higher U.S. yields pressure risk-driven assets by offering relatively stronger and safer returns. Yields retreated on Tuesday. South Africa's rand gave up early gains and was down 0.1% before its budget on Wednesday, while yields on 10-year bonds slipped. But Deustche Bank upgraded South African fixed income to "overweight".
"We find risk-reward once again attractive to express a more bullish bias into the budget. We believe the market has overshot relative to fundamentals and the more positive budget - which was well priced in by early February, is currently not priced in anymore." For GRAPHIC on emerging-market FX performance 2020, see http://tmsnrt.rs/2egbfVh For GRAPHIC on MSCI emerging index performance 2020, see https://tmsnrt.rs/2OusNdX
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