* Asian stock markets: https://tmsnrt.rs/2zpUAr4
* Turkish lira slips as Erdogan drops the central banker
* Bond yields are falling, equity has so far been mostly modest
* Yen is making some gains, watch out for Japanese retail investors
* Oil prices are falling again after falling sharply last week
Posted by Wayne Cole
SYDNEY, March 22 (Reuters). Asian markets were mixed, and bonds rallied on Monday as a collapse in the Turkish lira sparked discussion that capital controls may be needed to stem the flight, although the impact has been relatively subdued at the moment.
The dollar was 8% higher than the lira at 8.0500, but that was an early high of 8.4850 as Turkish authorities speculated they might have to intervene.
The decline came after President Tayyip Erdogan shocked the markets by replacing the Hawk central bank governor of Turkey with a critic of high interest rates. “The authorities have two options: either they commit to using the interest rates to stabilize the markets, or they carry out capital controls,” said Per Hammarlund, senior EM strategist at SEB Research.
“Given President Erdogan’s increasingly authoritarian approach, capital controls seem the most likely choice.”
The Japanese Nikkei fell 1.8% due to uncertainty, partly due to speculation. Japanese retail investors could suffer losses on large long positions in the high yield lira.
The waves were more modest elsewhere, as MSCI’s broadest index for stocks in the Asia-Pacific region outside Japan actually added 0.2%, helped by a 0.8% rise in China’s blue chips.
EUROSTOXX 50 futures fell 0.2% and FTSE futures 0.1%. Nasdaq futures firmed 0.4% while S&P 500 futures fluctuated on either side of the flat.
Treasury 10-year bond yields fell five basis points to 1.68%, suggesting some preferred safe havens.
Investors are still struggling to cope with the recent surge in US bond yields, which has made stock valuations look stretched for some sectors, particularly technology.
Bonds had another wobble on Friday when the Federal Reserve decided not to renew a capital concession for banks, which could reduce their demand for government bonds.
However, the damage was limited by the Fed’s promise to work on the rules to prevent strains on the financial system.
A number of Fed officials are speaking this week, including three appearances by Chairman Jerome Powell, which provide ample opportunity for more volatility in the markets.
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The fall of the lira on Monday resulted in modest yen development with notable gains against the euro and the Australian dollar. This in turn pushed the euro slightly down against the dollar to USD 1.1885.
After an initial slip, the dollar soon stabilized at 108.86 yen, while the dollar index remained stable at 92.077.
The yen was also supported by concerns that Japanese retail investors who have built long lira positions, a popular trade for the yield-hungry sector, could be squeezed out and trigger another round of lira selling.
Still, Citi analysts doubted the episode would result in widespread pressure on emerging markets. The last time the lira slipped in 2020, there was little impact.
“In terms of the impact on other parts of high-yield EM, we believe this will be quite limited,” Citi said in a note.
There was little evidence of safe haven gold demand, which fell 0.5% to $ 1,735 an ounce.
Oil prices fell again after falling nearly 7% last week as concerns over global demand led speculators to take profits on long positions after a long bull run.
Brent shed 37 cents to $ 64.16 a barrel while US crude fell 68 cents to $ 60.74.
(Reporting by Wayne Cole; Editing by Lincoln Feast and Christian Schmollinger)