EMERGING MARKETS-Stocks, FX dip; Turkish lira drops on central bank uncertainty

Turkey's lira dropped 0.7% against the dollar and was the worst performer in Europe, the Middle East, and Africa (EMEA), as markets waited to see whether the central bank would cut interest rates. The lira has hit a string of record lows in recent sessions after a major shake-up in central bank policy makers left investors doubting the bank's independence from the government.

Most emerging market stocks and currencies fell on Thursday as concerns over inflation dented sentiment, with Turkey's lira leading losses amid uncertainty over a central bank meeting later in the day. MSCI's index of emerging market (EM) stocks fell 0.5%, while currencies lost 0.1%, as investors stuck to safe havens on fears that growing inflation will stifle economic growth.

South Africa's rand fell 0.6%, while most central European currencies retreated against the euro. Turkey's lira dropped 0.7% against the dollar and was the worst performer in Europe, the Middle East, and Africa (EMEA), as markets waited to see whether the central bank would cut interest rates.

The lira has hit a string of record lows in recent sessions after a major shake-up in central bank policymakers left investors doubting the bank's independence from the government. "It makes no difference whether the Turkish central bank (TCMB) will lower the key rate by 50 or 100 basis points (bp) today. Because a rate hike is what is really required but certainly not a rate cut," Ulrich Leuchtmann, head of FX and Commodity Research at Commerzbank, wrote in a note.

The central bank cut rates to 18% last month, despite inflation reaching nearly 20% in Turkey. The cut was seen as an extension of President Tayyip Erdogan's opposition to high rates, which has seen him replace three central bank governors in the past two years. "As long as the TCMB does as it is told by the President, monetary policy will reflect the President's mistaken views," Leuchtmann said. Data from the Institute of International Finance showed that foreign investors have been consistently pulling out of the country since the rate cut last month.

Turkish stocks dipped 0.2%, as data showed consumer confidence in October touched its lowest level since February 2009. Russia's rouble dropped 0.5% on reports of a new, more contagious variant of COVID-19. President Vladmir Putin approved a government proposal for a week-long workplace shutdown at the start of November to combat a sharp rise in COVID-19 cases and deaths.

A fall in oil prices also hurt the rouble, while Russian stocks shed 0.2%. In Asia, Chinese stocks closed higher, with the real estate sector taking some support from indebted property developer China Evergrande securing an extension on a defaulted bond.

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