Emerging Markets

Emerging markets shares drop on deepening Turkey crisis

Key Points
  • Stocks in emerging markets fall sharply as a financial crisis in Turkey that sent its currency plummeting last week worsened.
  • The iShares MSCI Turkey ETF plunged 11 percent.
Turkish President Recep Tayyip Erdogan.
Okan Ozer | Anadolu Agency | Getty Images

Stocks in emerging markets fell sharply Monday as a financial crisis in Turkey that sent its currency plummeting last week worsened.

The iShares MSCI Emerging Markets exchange-traded fund (EEM) dropped 1.4 percent. Turkey shares led the way lower, as the iShares MSCI Turkey ETF (TUR) plunged 11 percent. China stocks and South Korea shares also declined more than 1 percent each.

"The escalation of the Turkish currency and economic crisis has had ripple effects across global markets," said Katie Nixon, CIO of wealth management at Northern Trust, in a note. "There are certain emerging market countries with relatively weak currencies and a heavy reliance on external (predominately dollar based) financing. The fear is that what happens in Turkey won't stay in Turkey."

The Turkish lira hit a fresh record low overnight against the dollar, briefly pushing it to 7.24. The lira later regained some footing to trade around 7 per dollar.

The Turkish currency fell more than 14 percent on Friday after President Donald Trump announced he was doubling metals tariffs on Turkey. Trump's announcement followed comments made by Turkish President Recep Tayyip Erdogan asking citizens to convert their dollars and other foreign currencies and gold to lira.

Tensions between the two countries intensified after a Turkish delegation returned from Washington with no apparent progress on the detention of U.S. pastor Andrew Brunson, who is charged with supporting a group blamed for an attempted coup in 2016.

Turkey's central bank tried to ease global investors' fears on Monday, stating it will provide as much liquidity as needed to the country's banks. The central bank also said it will keep monitoring the situation closely.

The Turkish economy has been reeling recently as its inflation rate reached 16 percent last month, well above the central bank's 5 percent target. Central banks usually raise rates in order to keep inflation in check. But Erdogan has opted to keep rates low in an effort to drive growth.

"The situation in Turkey has turned dire with the currency in free-fall in recent days," Bruce Kasman, managing director of global research at J.P. Morgan, wrote in a note Friday. "While the immediate trigger has been the intensification of tensions with the US, including threats of sanctions and tariffs, the weakening of the currency fundamentally reflects the delay in adequate policy response to the deterioration in the fiscal and external accounts and in bank asset quality."