The Turkish central bank announced an emergency policy meeting after emerging markets took another beating on Monday, sending the Turkish lira to a record low and sinking the equity and bond markets in Europe.
The lira edged up a bit, after hitting a low 2.39 to the U.S. dollar, after the Turkish central bank said it would meet Tuesday "to take necessary policy measures for price stability." Currency traders are betting that a decisive rate hike is coming even though prime minister Tayyip Erdogan has warned that higher borrowing costs would damage economic growth.
The bank left rates on hold last week even though the lira was sinking fast, possibly for fear of raising rates in an election year. On Thursday, it intervened in the foreign exchange market for the first time in two years in an effort to prop up the currency. But the effort failed, leading to speculation that a decisive interest rate hike would emerge as the bank's next move.
About $1-trillion (U.S.) has been lost in emerging market equities since last spring, when the U.S. Federal Reserve revealed it would reduce its monthly asset-purchase program. Later this week, the Fed is expected to announce that the program will be trimmed again.
The slower asset-purchase program, the sudden devaluation of the Argentine peso, fears of problems within China's vast shadow banking system and slowing Chinese growth – manufacturing has been contracting – have stoked the sell-off. Political turmoil in Ukraine and Thailand, and a corruption scandal in Turkey, have only added to the sense among some traders and investors that the market rout may not be temporary.
The prospect of higher interest rates in some economies on the mend, notably Britain and the United States, has not helped.
"The irony is that the improving economic data is bringing forward future expectations of slightly higher interest rates, not only in the U.S., but in the U.K. as well and it seem quite likely that if the Fed does decide to taper another $10-billion of asset purchases then the flow of funds coming out of emerging markets could well turn into a torrent," Michael Hewson, chief market analyst at CMC Markets UK said in a note.
The Hang Seng index in Hong Kong was down 2.1 per cent as the emerging markets rout continued while Japan's Topic lost 2.8 per cent. The FSTE Emerging Markets index fell 1.4 per cent in afternoon European trading, taking its loss since the start of January to more than 6 per cent. In London, the benchmark FTSE 100 index lost 1.5 per cent and sovereign bond yields in Greece surged.
Economists and strategists, however, were not all convinced the rout would turn into a bood bath. In a note, HSBC said the sell off "is due mainly to a series of painful but unrelated flare-ups in key EM markets, rather than contagion."
Capital Economics said December saw "significant" net outflows from the emerging markets but noted their scale was much smaller than the one in June. In the third quarter, the emerging countries Asia were actually attracting higher capital inflows, on a 12-month rolling basis, though the inflows into Latin America were flat and fell in the emerging eastern European countries.
Typically, capital moves into emerging markets when growth in those markets is expected to be high. Economic growth in the emerging market was 8 pe cent in 2010, according to Capital Economics. But that figure should fall to 5 per cent in the next couple of years, suggesting emerging markets will struggle to attract risk-tolerant investors.