LDN - Business

Calm and confident before central bank deluge, Turkey lira crashes

[December 13, 2021] By Dhara Ranasinghe

LONDON (Reuters) -Stocks and the dollar firmed on Monday as a generally upbeat mood took hold of world markets ahead of a host of central bank meetings this week that could include the U.S. Federal Reserve flagging an early end to its bond-buying stimulus.

Equity markets across Europe, with the exception of London, rallied, with the pan-region STOXX 600 index last up 0.5%. U.S. equity futures pointed to a strong Wall Street open.

China's blue-chip CSI300 index closed up 0.6%, having earlier risen to its highest in almost five months on hopes for more stimulus as the country's top leaders vowed to prioritise economic stability in 2022.

Turkey's lira was the day's standout loser, crashing as much as 7% to a new record low as the prospect of another interest rate cut this week loomed.

Omicron remained a concern, with British Prime Minister Boris Johnson warning of a "tidal wave" of new cases of the coronavirus variant, weighing on the FTSE index and sterling.

Still, with markets counting on vaccines to limit the economic fallout, the dollar was broadly firm ahead of Tuesday's two-day Federal Reserve meeting.

The U.S. central bank is expected to signal a faster tapering of asset buying, and thus an earlier start to rate hikes. It will also update the dot plots for rates over the next couple of years.

Also meeting are the European Central Bank, the Bank of England and the Bank of Japan. All are heading toward normalising policy at their own, often glacial, pace.

"We expect that ultimately the main central banks will begin hiking interest rates, and the market certainly expects that," said April LaRusse, head of fixed income investment specialists at Insight Investment.

"If the Fed increases the taper from $15 billion to something like $30 billion they could be finished by March, which would allow them to look to hike rates after that," she added.

The Treasury market has taken the risk of earlier Fed hikes with equanimity, perhaps looking ahead to lower inflation over the long run and a lower peak for the cash rate.

At 1.48%, 10-year Treasury yields remain well below this year's peak of 1.776%. [US/]

U.S. and European bond yields were lower on Monday.

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A man watches an electric board showing Nikkei index outside a brokerage at a business district in Tokyo, Japan, June 21, 2021. REUTERS/Kim Kyung-Hoon

The ECB, meeting on Thursday, is likely to confirm that its 1.85 trillion euro ($2.09 trillion) pandemic emergency stimulus scheme will end next March.

Expectations for a rate hike at Thursday's Bank of England meeting have been pulled back as Omicron raises concern about the near-term economic outlook.

"The markets are pretty confident about the outcome of this week's meetings and so it's a supportive environment until then," said Mizuho rates strategist Peter McCallum.

FIRM DOLLAR

The dollar index was around 0.25% firmer at 96.329. The greenback gained a fifth of a percent to 113.63 yen, while the euro slipped almost 0.4% to $1.12745.

Britain's pound managed to claw back some ground after falling on the government's latest Omicron warnings. Prime Minister Boris Johnson said the first patient in the United Kingdom had died after contracting the Omicron variant.

Sterling was last down just 0.1% at $1.3256.

Oil prices slipped, giving up early gains. Brent crude fell 0.5% to $74.80 a barrel, while U.S. West Texas Intermediate was 0.4% lower at $71.37.

Elsewhere Turkey's lira fell to a new record low near 15 to the dollar, gripped by worries over President Tayyip Erdogan's risky new economic policy and prospects of another rate cut at Thursday's central bank meeting.

The central bank announced its fourth market intervention in two weeks, selling dollars, as the slide to 14.99 left the lira worth just half of its end-2020 value.

"Some economists thought the lira was cheap to fair value months ago, but the loss of central bank credibility may not be quantifiable," Marc Chandler, chief market strategist at Bannockburn Global Forex, said in a note.

"Ultimately, the era of floating exchange rates is a confidence game to a large extent, and it has lost it."

(Reporting by Dhara Ranasinghe; Additional reporting by Wayne Cole in Sydney and Karin Strohecker; Editing by Kirsten Donovan and Jan Harvey)

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