European shares rise after Turkish rate hike

LONDON/TOKIO/SYDNEY - Reuters

Turkey stunned investors with a huge hike in interest rates, stirring hopes drastic action would short-circuit a vicious cycle of selling in emerging markets and revive risk appetite. REUTERS photo

European shares rose on Jan. 29 after Turkey hiked all its key interest rates overnight to defend its currency, helping to buoy equity markets that had been hit by waning appetite for riskier assets. 

Turkey's Central Bank raised its overnight lending rate to 12 percent from 7.75 percent in a much sharper move than forecast, and investors said it could help stem a recent sell-off in emerging markets. 

"It's a step in the right direction," said Berkeley Futures associate director Richard Griffiths. The pan-European FTSEurofirst 300 index was up 0.8 percent at 1,308.29 points in early trading, and the euro zone's blue-chip Euro STOXX 50 index rose 1 percent to 3,068.96 points.

Britain's top share index also rose with miners leading the market higher following positive corporate news. 

Equity investors, jittery over recent currency turmoil in emerging markets that could affect the pace of the global economic recovery, increased their exposure to riskier assets after Turkey acted to prevent its lira from sliding further. 

"It's a positive knee-jerk reaction to a policy response. But the underlying concern is that domestic demand gets killed because you are tightening monetary policy so aggressively," Graham Bishop, senior strategist at Exane BNP Paribas, said. 

"We are cautious. It's not a conducive backdrop for the market to go higher as concerns about valuations, earnings and emerging markets are continuing." 

Asian markets enjoy relief

Asian markets rallied Jan. 29 after Turkish Central Bank's hike in interest rates, stirring hopes drastic action would short-circuit a vicious cycle of selling in emerging markets and revive risk appetite. 

The relief was enough to lift Japan's Nikkei 2.7 percent and S&P 500 e-mini futures 0.5 percent, while traditional safe havens such as the yen, bonds and gold all eased. 

MSCI's broadest index of Asia-Pacific shares outside Japan rose 1.2 percent after three sessions of falls. 

More emerging market central banks are expected to take steps to quell a mix of inflationary pressures at home and a flight of capital abroad. South Africa's central bank also holds its policy meeting later on Jan. 29. 

Later in the session, the improved mood will face an test from the U.S. Federal Reserve, which is widely expected to trim its asset buying program by another $10 billion a month at the conclusion of its two-day policy meeting.