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Aug. 13, 2018, 10:36 a.m. EDT

Turkish lira crisis sends shock waves across emerging-market funds

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By Mark DeCambre, MarketWatch


AFP/Getty Images
Turkey tantrum in emerging markets?

Emerging-market assets were under severe pressure on Monday as Turkey’s currency crisis continued to stoke fears of spillover effects.

Among funds that track the emerging-market sector, the iShares MSCI Turkey ETF /zigman2/quotes/205815187/composite TUR +0.98% , which on Friday saw its worst one-day decline since Oct. 15, 2008, was down 8% Monday and on track to lose 55% of its value so far this year, based on FactSet data. If the fund falls below 19 it would put it in position to post its lowest closing value since November 2008.

The slide comes as Turkey and its President Recep Tayyip Erdogan have thus far failed to stem a dramatic decline in its currency, which came to a head on Friday, and accelerated, as President Donald Trump tweeted that he had authorized the doubling of steel and aluminum tariffs on the country.

Turkey’s lira was trading at fresh all-time low against the U.S. dollar, after shedding some 14% of its value at the end of last week. The Turkish lira /zigman2/quotes/210561895/realtime/sampled USDTRY -0.0885% is down more than 6% on Monday after Turkey’s central bank pledged to provide “all the liquidity the banks need” in a statement Monday. It also said banks would be able to borrow currency deposits from the central bank at a one-month maturity and one-week maturities. Analysts said Turkey’s reluctance to raise interest rates stood out.

The moves failed to calm jittery nerves about emerging markets, which had already been under pressure on the basis of a U.S. dollar that has enjoyed a renaissance so far this year. As measured by the ICE U.S. Dollar Index /zigman2/quotes/210598269/delayed DXY -0.53% , a gauge of the buck against a half-dozen assets, the dollar has climbed 4.7% over the past eight months, and more than 2% in August alone, touching a 14-month high on Friday.

Investors tend to buy emerging-market assets because they can offer a richer return than comparable U.S. assets; however, that richer return comes with risk. As the dollar strengthens, it can make it more difficult for countries with dollar-denominated debts to service their financial obligations in local currency.

Turkey’s dilemma has served to underline the concerns about emerging markets, which had thus far run in the background as the dollar saw mostly sideways trade in recent weeks.

“The risk-off sentiment spread into other markets with the South African rand plunging more than 10% early Monday to trade at a two-year low of 15.32 per dollar. The Argentina peso and Russian ruble were also among the biggest decliners in emerging market currencies,” wrote Hussein Sayed, chief market strategist at FXTM in a Monday research note.

Indeed, the iShares MSCI South Africa ETF /zigman2/quotes/200534867/composite EZA +0.20%  was down 0.7%, and has lost nearly 21% so far this year. The South African rand /zigman2/quotes/210561940/realtime/sampled USDZAR -0.8100%  was down more than 3% against the buck, with one dollar buying 14.0344, compared with 14.0760 on Friday.

Meanwhile, the iShares MSCI Brazil ETF /zigman2/quotes/208893627/composite EWZ -0.89%  slipped by 0.2% and was set to shed more than 16% thus far in 2018. One dollar last bought 3.8583 Brazilian real /zigman2/quotes/210561973/realtime/sampled USDBRL -0.1001% , compared with 3.8642 late Friday.

In other funds, the iShares MSCI Mexico ETF /zigman2/quotes/203022585/composite EWW -0.41%  was up 0.1%. The fund is holding on to a year-to-date return of 0.8%. Mexico’s peso /zigman2/quotes/210561814/realtime/sampled USDMXN +0.3616% was off more than 1% against the buck, with a dollar changing hands at 19.2446 pesos, compared with 18.9109 on Friday.

In Russian assets, the VanEck Vectors Russian ETF /zigman2/quotes/200464876/composite RSX 0.00% rose by 1.5% and but is off 6.3% this year so far. The ruble, which had already touched a 2-year low late last week amid further U.S. sanctions, were trading about 0.7% lower. One dollar last bought 68.174 rubles /zigman2/quotes/210561862/realtime/sampled USDRUB -0.1275% , compared with 67.718 late Friday in New York.

A broad gauge of emerging-market assets, the Vanguard FTSE Emerging Markets ETF /zigman2/quotes/204649024/composite VWO -0.37%  slumped by 0.7% and has given up 8.4% thus far in 2018.

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99.34
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Volume: 0.00
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15.0013
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0.00 0.00%
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64.0743
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$ 43.22
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Mark DeCambre is MarketWatch's markets editor. He is based in New York. Follow him on Twitter @mdecambre.

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