Turkish assets stumble on c.bank head's sacking, broader markets glum

Turkish lira weakens to 5.8125 after cenbank governor dismissed

Asian shares were a sea of red on Monday after strong US job gains tempered expectations the Federal Reserve will deliver a large rate cut, while the Turkish lira hovered near two-week lows on worries about central bank independence.

"What will this mean for Turkey's institutions (in general), might there be some re-shuffle of key posts, and will Erdogan further tighten his grip". "Maybe the market's waiting for clearer signs about what the implications are", said William Jackson, chief emerging markets economist at Capital Economics.

Monday's falls in the lira and the governments bonds were the sharpest in months, but by the standards of the last year-and-a-half they were still relatively measured and also came after hefty relief rally over the last couples of months.

Global equities have generally been bolstered by expectations that central banks will keep the interest rates at or near record lows to boost economic growth.

The US has also threatened to hit Turkey with sanctions if it goes ahead with the S-400 deal, though Ankara previously said it was prepared for any possible US measures.

Turkey's purchase of S-400 missiles from Russian Federation has sparked threatened sanctions from the United States, but Erdogan said U.S. President Donald Trump spoke of no sanctions against Ankara after they met in Osaka, Japan late last month on the sidelines of a G20 summit.

The decision to sack the central banker and replace him with deputy governor Murat Uysal has sparked worries that the central bank will slash interest rates by more than expected.

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Esther Reichelt, FX & EM Analyst at Commerzbank in Frankfurt, said the lira's losses on Monday were surprisingly modest.

In a written statement on Saturday, Uysal said he would independently implement monetary policy instruments focused on achieving and maintaining the primary objective of price stability.

"The central bank will make a major policy mistake if it cuts rates by a few hundred basis points on July 25", Rabobank strategists, including London-based Piotr Matys and Hong Kong-based Michael Every, wrote in a report.

Two government sources told Reuters that disagreement between the government and the governor over monetary policy had intensified in the past few months.

However, in September past year, Turkey increased its benchmark interest rate from 17.5% to 24%.

The Turkish economy shrank sharply for the second straight quarter in early 2019 as the crisis, persistent double-digit inflation and high interest rates took a toll on overall output.

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