Asian markets swing as inflation fear tempers recovery hope
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Asian markets fluctuated Monday as the battle between economic optimism and fears about the inflation and possible rate hikes the recovery will fuel continues to play out on trading floors.
The Turkish lira plunged more than 17 percent at one point in early trade after President Recep Tayyip Erdogan sacked the country's market-friendly central bank chief and replaced him with a former ruling party lawmaker.
After a year-long rally across global indices, investors are struggling to maintain the momentum as government bond yields push ever higher -- a sign that borrowing costs will rise in the future.
The sharp rise in US Treasury yields -- which go in the opposite direction to prices -- is being caused by investors selling the bonds owing to expectations the strong recovery and vast government spending will fire inflation.
The panic comes despite repeated pledges by Federal Reserve boss Jerome Powell and other top officials including Treasury Secretary Janet Yellen that the jump in inflation will likely only be temporary and the bank will do whatever is needed to prevent it getting out of control.
In a sign of the battle facing the Fed in keeping traders' fears at bay, a survey released Monday showed almost half the US economists asked said they thought the bank would hike rates from their record low next year and almost a third thought an increase likely in 2023.
And while vaccine rollouts are picking up in Britain and the United States, investors are growing worried about Europe, where the inoculation programme has stuttered and a hike in new cases forces countries including France and Germany to reimpose lockdowns.
"Clearly, the market is sceptical that the Fed will be able to keep interest rates at current levels for the next three years," Diana Mousina, at AMP Capital Investors, said.
"We think that nominal bond yields can still shoot higher in the short-term towards two percent and above on inflation concerns. Markets are likely to worry that this move is permanent, rather than temporary."
Turkish lira collapses
After a largely negative lead from Wall Street, Asia struggled.
Tokyo led losses, diving more than two percent with carmakers including Toyota, Honda and Nissan all taking a hit after a fire at one of chipmaker Renesas' biggest plants halted production of key components in their vehicles.
Renesas warned the fire could shut the plant for a month, putting a strain on an already stretched chip market, which has caused a headache for auto firms as well as tech giants.
Hong Kong, Seoul, Mumbai, Singapore, Manila, Jakarta and Wellington also fell, while Shanghai, Sydney, Bangkok and Taipei rose.
But in Europe London, Paris and Frankfurt dropped at the start of trading.
"Markets quickly moved from a risk-on dovish Fed narrative to concerns about vaccines, renewed European lockdowns, tense US-China trade talks, equity rotation out of tech, and falling oil prices," said Axi strategist Stephen Innes.
On forex markets the Turkish lira was hammered by Erdogan's decision on Friday to sack central bank boss Naci Agbal and replace him with former ruling party lawmaker Sahap Kavcioglu.
The currency fell to as low as 8.47 per US dollar on Monday, having closed at 7.22 at the end of last week. It later recovered slightly, though the Istanbul stock exchange suspended trading briefly after it plunged six percent at the open.
While a presidential decree on Friday did not explain why Agbal had been removed, it came just a day after the bank hiked interest rates more than two percentage points to 19 percent as it looked to fight inflation.
The move by Erdogan has thrown the independence of the bank into question and raised fears of a new bout of financial turbulence in the country.
"We can expect some severe burning of foreign reserves to defend the Lira. It is unlikely to stave off the inevitable, though, and I expect Turkish equities and foreign currency bonds to be thrashed this afternoon and for downside pressures to resume on the lira," said OANDA's Jeffrey Halley.