Turkey's lira steady, stocks hit record high after US sanctions

The Turkish lira has held steady as investors weighed the impact of US sanctions over the country's purchase of a Russian S-400 defence system, while the country's benchmark stock index reached a record high.

The lira extended gains to trade at 7.8346 per dollar. It had rallied 1 percent to as much as 7.8160 per dollar on Monday after Washington imposed on Ankara light, targeted sanctions.

The threat of US sanctions had weighed on the lira for months, but the US move on Monday targeted only Turkey's Presidency of Defence Industries, its head Ismail Demir and three other officials over Ankara's purchase Russian missile defense system, not the broader economy.

READ MORE: US sanctions a 'grave mistake'

Turkey had turned to Russia after Barack Obama's administration failed on offering the purchase of US Patriots – the air defence system of choice for most NATO member states.

"It was clearly better than feared," said Peter Kinsella, head of FX strategy at UBP. "The fact they had only placed sanctions on the defence industry and not the banks is pretty important."

Turkey's benchmark stock index reached a record high, with Halkbank jumping 5 percent. The bank was previously indicted on charges of helping Iran evade US sanctions.

Other emerging-market currencies also gained, with Russia's rouble up 0.6 percent, recovering partly from losses the day before.

Its central bank meets on Friday and is widely expected to leave its main interest rate unchanged at a record low, according to a Reuters poll. But inflation has recently exceeded its target, limiting room for further rate cuts.

"The underlying story for the rouble is pretty constructive. You've got oil prices that are looking a lot more solid than they were before. That's very good, particularly for their current account surplus," Kinsella said.

Meanwhile, emerging-market equities struggled as surging Covid-19 cases led to new lockdowns across Europe.

READ MORE: The double standards of America's sanctions threat to Turkey

The mood was glum across developing-world stocks, with the MSCI EM equities index dropping 0.3 percent as surging Covid-19 deaths globally and new lockdowns outweighed optimism about the availability of vaccines.

The number of coronavirus deaths in the United States crossed 300,000 on Monday as the hardest hit nation started its first vaccine inoculations, while tighter Covid-19 restrictions were imposed on London.

In eastern Europe, Hungary's forint was at a one-month high versus the euro before a central bank meeting where policymakers are expected to leave its base rate unchanged at 0.6 percent.

However, some analysts say the bank could reverse September's 15-basis-point increase by the end of the first quarter if market conditions remain favourable and inflation declines.