LONDON (Aug 14): A bounce in Turkey's lira from a record low hit in the previous session provided respite on Tuesday for other currencies that have been caught in the crossfire, but emerging equities hit a 13-month low after weak China data.
Investors had scrambled to cut emerging market exposure across the board after the lira went into freefall over concerns about the direction of monetary policy under President Tayyip Erdogan and Turkey's worsening relations with the United States.
But with Turkey's lira rebounding 4.5%, emerging currencies stabilised, with South Africa's rand 2.3% firmer after hitting a two-year low on Monday.
Other beaten down currencies also rallied, with Russia's rouble firming 1.4% and Mexico's peso 1.1%.
But MSCI's benchmark emerging equities index touched its lowest level since July 2017 in Asian trading after disappointing Chinese data, before recovering to trade flat in the European session.
Turkey's lira was recovering from a record low of 7.24 per dollar hit on Monday, but Piotr Matys, a strategist at Rabobank, said the relief was likely to be short-term. The lira was still down around 40% year-to-date, he said.
The currency found a floor after the central bank pledged to provide liquidity, but Matys said the damage was done.
"Inflation is set to accelerate even further from already high levels and Turkey may not avoid a hard landing after the economy grew above potential over the last few quarters, so the outlook is quite bleak," he said.
Investors are awaiting Thursday's conference call with finance minister Berat Albayrak at which he will have to convince the market Turkey will not try to maintain rapid growth at all costs.
"However, the issue is that he lacks credibility," said Matys, adding that investors wanted to see concrete steps in terms of fiscal measures and structural reforms.
Turkish sovereign bonds rose across the curve, with some issues gaining around 2.6 cents, while five-year credit default swaps fell 40 basis points from Monday's close to 540 bps. Turkish stocks also bounced 1.6%.
But more broadly emerging stocks struggled after signs China's economy was cooling further, with fixed-asset investment growth at its slowest pace since at least 1996. Retail sales also missed expectations.
Chinese mainland shares fell 0.5% and Hong Kong stocks dipped 0.6%, while the yuan touched its weakest level since May 2017.
Matys said that even if a full-scale financial crisis was avoided in Turkey, emerging markets were facing the same headwinds as before: "These include the ongoing trade war between the US and China and signs of an FX war."
Indonesia shares tumbled 1.5% but emerging Europe opened stronger after data showed the region's economies continued to grow robustly.
Budapest shares rose 0.9% after Hungary's annual growth picked up to an above-forecast 4.6%, while Warsaw stocks gained 0.6% with GDP growth at 5.1%.
India's rupee firmed 0.1% after hitting record lows in the previous session, but the Argentine peso fell 2.4% to close at a record low overnight.
Argentina's central bank raised rates by 5 percentage points on Monday to 45%, but the currency has been pressured by a corruption scandal and the negative sentiment driven by the turmoil in Turkey.