Asia rallies after Turkey hikes

The emerging market story was once again the main driver of price action through Asian trade with Turkey at the forefront of market activity.

The lead from US trade had been fairly subdued but the ticker boards were lit up at 9.00am AEDT when the Turkish central bank aggressively hiked rates. There had been plenty of speculation around what action Turkey would take after we learned of a surprise 25bp rate hike by the Reserve Bank of India.

The central bank of Turkey hiked the overnight lending rate to 12% (from 7.75%) and the overnight borrowing rate to 8% (from 3.5%). Additionally, the repo rate was raised to 10% (from 4.5%) and a weekly repo rate of 10% will be used in funding the banks. This was much more aggressive than what the market - and even the most hawkish analysts - was expecting and really showed Turkey is prepared to do whatever it takes to support its currency. This move is aimed at stabilising the TRY and keeping inflation under control.

The result was a big jump in the Turkish lira as USD/TRY dropped to 2.174 - its lowest level since January 14 - and has continued to fall in Asia. The moves were quite similar in all the TRY crosses, with the lira gaining ground against the EUR, JPY and GBP as well.  There is a strong chance that we’ll see some of these moves extended once European trade commences later today.

Markets on central bank watch

Asia managed to break its losing streak today with high beta names leading the recovery. Japan’s Nikkei steamed ahead after USD/JPY broke back above 103 and encouraged bargain hunting in Japanese equities. While Turkey has grabbed the headlines today, there is still plenty more central bank action ahead this week, with the Fed, South Africa and Bank of New Zealand the key ones to watch.

The Fed decision has analysts split but there is a growing camp which feels the Fed will taper by another $10 billion; evenly split between mortgage backed securities and treasuries. After that sharp miss in the non-farm payrolls data recently, it will be interesting to see if this makes any difference at all to the Fed’s commentary on economic assessment. Apart from central bank watch, earnings will remain pivotal with some big names coming up over the next couple of days.

Aside from some pretty big disappointments, Apple in particular, earnings have actually been generally good but perhaps haven’t shot the lights out like some would have hoped. The latest stats suggest 71% of companies that have reported so far have beaten on the EPS front and around 65% on the revenue front. Over the next couple of days we have the likes of Boeing, Facebook, Google and ConocoPhillips set to report.

Europe in for a strong start

Looking ahead to European trade, the major bourses are facing some solid gains at the open, with the momentum from Asian trade set to continue. While the European economic calendar is relatively light, BoE Governor Mark Carney’s speech will deserve some attention after Q4 GDP yesterday only managed to come in-line with expectations. Some sterling bulls would have been spooked by the GDP print as it is likely to see the BoE maintain there is no imminent need for a hike. Instead Carney is likely to reinforce he is in no hurry to raise borrowing rates.

Iron ore plays bounce

The local market took off this morning with the cyclical names leading the charge as investors reacted to the developments out of Turkey. Iron ore names have finally enjoyed some gains led by Atlas Iron, which put in a solid performance on the back of its Q2 output report, resulting in its stock trading back above a dollar. A close above $1 is a near term positive for AGO shares and could be the beginning of a steady recovery, after having been drastically sold off over the past few weeks. However, the fact that iron ore prices continue to struggle heading into the Lunar New Year could be a source of downside risk.

Apart from materials, the consumer discretionary and infotech sectors also put in a solid performance while the healthcare space has remained resilient. 

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