A surprisingly large interest rate hike by the Turkish central bank only gave the lira a temporary reprieve last night, as the currency reversed an initial 4% gain to head for new lows. The South African central bank also raised benchmark rates in a surprise move to halt the free-fall in the rand, but these moves have not staunched the hemorrhaging in emerging markets stocks and currencies. India’s central bank had raised the repo rate a half percent to 5.5% in a surprise move yesterday to support the rupee.
These emerging markets benefited from the Fed money printing, as cash poured into their economies looking for higher yields. Now that the free money spigot is slowing being closed, that money is rushing back out, to return to the U.S. and Europe. The recent crisis in these countries stems from the belief that the Fed will continue its steady reduction in quantitative easing purchases by another $10 billion, to $65 billion a month.
Gold was stronger in Europe as the Turkish gambit began to fail, and popped higher in early New York trading. Silver followed suit, while the PGMs retrace yesterday’s levels. The continuing platinum mine strikes in South Africa have not given the sector a price boost, perhaps because the mining companies have a six-to-eight week supply of above-ground ore on hand.
Both gold and the yen saw safe haven demand in Asia, as protesters in Thailand vow to disrupt elections this weekend in a continuing bid to oust Prime Minister Yingluck Shinawatra. The protests, which started October 31, have turned bloody, with bombs hurled into crowds. Gold saw further strength in Europe, as Turkey seems to be falling into economic chaos, and the streets are still burning in western Ukraine, where protesters continue to demand the ouster of the government.
In the U.S., President Obama’s State of the Union address to Congress was a preview of the dysfunction in Washington that will reign when the next debt ceiling fight begins next week.
Wall St. opened sharply lower on poor earnings and concerns over companies with a large exposure to emerging markets. Traders anticipate the outflow from those markets to accelerate if the Fed reduces bond purchases today, as anticipated. The Fed’s Open Market Committee meeting will conclude this afternoon, and will release a statement at 2pm. This is Ben Bernanke’s last FOMC meeting before his retirement on Friday. Vice Chairman Janet Yellen, a close Bernanke ally, will take the helm.
Asian markets gained as the default crisis in China was averted, with the Nikkei jumping 2.7% off yesterday’s lows. Today’s gains broke a four-day losing streak for Japanese stocks. The Hang Seng also broke a four-day streak of losses, and mainland Chinese shares also advanced.
Euro stocks were caught in the resumption of the emerging market meltdown, as Turkey’s woes have a great influence on the EU. Worries are that a collapse of the Turkish economy could drag neighboring Greece down with it, as Greek banks have a large exposure to Turkish debt.