Asian stocks retreat as Turkey worries weigh, dollar buoyant

TOKYO (Reuters) - Asian stocks retreated on Wednesday, failing to follow Wall Street’s gains, while the dollar was near a 13-month high as concerns about Turkey’s financial crisis weighed on investor appetite despite the lira’s move away from an all-time low.

Passersby using umbrellas struggle against a heavy rain and wind in front of an electronic stock quotation board as Typhoon Shanshan approaches Japan's mainland in Tokyo, Japan August 8, 2018. REUTERS/Toru Hanai

The lira TRYTOM=D3 --which plummeted to a record low of 7.24 to the dollar at the week's start, rattling global markets-- was slightly weaker at 6.415 after rebounding more than 8 percent overnight.

Wall Street’s three main indexes rose on Tuesday as the lira’s climb eased fears of broader financial contagion for now. A string of robust earnings also boosted U.S. shares.

But the rise in U.S. shares did not carry through to Asia, with MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS sliding 0.8 percent after bouncing 0.4 percent the previous day when the lira showed signs of stabilizing.

Hong Kong's Hang Seng .HSI dropped more than 1 percent and the Shanghai Composite Index .SSEC fell 0.1 percent. Signs of the world's second-largest economy losing momentum and the ongoing Sino-U.S. trade conflict have weighed on Chinese equities.

Australian stocks rose 0.1 percent and Japan's Nikkei .N225 slipped 0.4 percent after rallying more than 2 percent on Tuesday. South Korean markets .KS11 were closed for a public holiday.

“The equity markets are waiting for the next steps after gaining strongly yesterday. The drop by the Turkish lira may have stopped, but the country is yet to tackle the fundamental problems facing it, and this has kept market sentiment subdued,” said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management in Tokyo.

Keeping the markets wary, Turkish President Tayyip Erdogan said on Tuesday that Ankara would boycott electronic products from the United States, retaliating in a row with Washington that has helped drive the lira to record lows.

Underscoring lingering concerns over the crisis in Turkey, the dollar hovered near a 13-month peak against a basket of currencies, supported by its safe-haven status.

The dollar index, which measures the greenback’s strength against a group of six major currencies stretched overnight gains and reached 96.82, .DXY, its highest since late June 2017.

The strength of the U.S. currency was compounded by the euro’s fall, which has been dogged by potential risks to European banks from the financial turmoil in Turkey.

“The lira rallied yesterday, but there is not remedial plan for Turkey’s internal and external imbalances. Europe’s banks will have to reserve more against these potential losses, and already low capital adequacy ratios will be tested,” wrote Carl Weinberg, chief international economist at High Frequency Economics.

The euro dipped to $1.1326 EUR=, its weakest since July 2017. The euro also struggled near a 13-month low versus the Swiss franc EURCHF=, a traditional safe-haven currency.

Adding to overnight gains, the dollar last traded up 0.15 percent at 111.32 yen JPY=.

China's onshore yuan CNY=CFXS came within a whisker of a 15-month low of 6.8965 per dollar marked early in August after the country's central bank set the weakest mid-point since May 2017 following the dollar's broad surge.

Government bond yields, meanwhile, nudged higher amid the ebb in risk aversion.

The benchmark 10-year Treasury note yield US10YT=RR stood around 2.89 percent, having bounced from a three-week low of 2.848 percent set on Monday.

Yields on British gilts and French bonds have also pulled away from multi-week lows.

Crude oil prices felt pressure from a stronger dollar, which increases the cost burden on non-U.S. buyers of commodities.

Brent crude futures LCOc1 dipped 0.2 percent to $72.31 a barrel and U.S. crude CLc1 shed 0.35 percent to $66.81 a barrel.

Spot gold XAU= fell to an 18-month low of $1,190.05 an ounce, having declined 1.6 percent this week.

Three-month copper on the London Metal Exchange CMCU3 edged down 0.2 percent to $6,036 a tonne, coming close to a one-year low of $5,988 seen in July. Easing fears over a possible strike at a mine in Chile accelerated the metal’s fall.

Editing by Sam Holmes and Eric Meijer

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