The Australian sharemarket staged a cautious rally along with other Asian markets after Turkey more than doubled overnight borrowing rates to avert a looming currency crisis.
The S&P/ASX 200 index opened 0.3 per cent higher after the US markets rallied 0.6 per cent, but it extended gains, closing 53.9 points, or 1.04 per cent, up at 5229 as fears of an emerging crisis eased.
In an emergency overnight session aimed at halting destabilising currency speculation, Turkey hiked its overnight borrowing rate from 3.5 per cent to 8 per cent and benchmark repo rates from 4.5 per cent to 10 per cent, more than doubling the cost of funding short Turkish lira positions.
But with rates across the yield curve now around 10 per cent, the Turkish policy medicine risks killing the patient.
Emerging market currencies have come under sustained pressure after the US Federal Reserve began tapering its bond purchases this month and analysts fear Turkey’s radical move might not be enough as concerns linger over signs of a cracks in China’s credit markets.
Chinese authorities cobbled together a last minute bailout of the coal-miner linked $500 million Chinese Credit Trust that was set to default at the end of the month, but concerns remain other defaults are lurking in the $1.9 trillion high yield, high risk financial trust market as the central bank keeps a lid on rampant credit extension.
“Even if the government could avert defaults and force banks to bring it onto their balance sheet, future growth in this important segment of finance is likely to contract sharply,” Royal Bank of Scotland currency strategist Greg Gibbs said.
“Much of the growth in fixed asset investment that it finances may also contract, potentially causing a collapse in GDP growth. Once this important segment of GDP growth falls, contagion to the rest of the economy is likely to be hard to stop, even for the Chinese government with its direct levers of control.”
The Shanghai composite index was up 0.3 per cent at the close of the ASX, while in Tokyo the Nikkei index jumped 2 per cent.
The Australian dollar climbed US 0.5¢ to US88.05¢, while government 10-year yields jumped 7.3 per cent to 4.102 per cent as safe-haven demand abated.
US 10-year yields climbed 4 points to 2.78 per cent on concerns the Fed could announce further tapering measures tomorrow morning.
Overnight US data was mixed as December durable good fell 4.3 per cent and November’s surprise jumped was revised down, while the Conference Board consumer confidence index bounced in defiance of a fall two weeks ago in the University of Michigan sentiment survey.
"The Turkish central bank’s decision to lift their interest rates has certainly been a good lift for risk assets, and that happened just before the open here,” OptionsXpress market analyst Ben Le Brun said on Wednesday.
"I think to a large degree we’ve got that to thank. It’s been a nice bounce back."
Mr Le Brun said attention would now turn to the outcome of the two day policy meeting of the US Federal Reserve’s Federal Open Market Committee (FOMC).
The FOMC will decide whether or not the central bank continues to taper its stimulus measures for the US economy.
Observers are expecting further tapering but if there is a smaller cut than expected, or no cut at all, the reaction in share markets is likely to be positive.
Locally, resources stocks rose, with BHP Billiton gaining 56 cents to $36.87, Rio Tinto rising $1.49 to $65.80, and iron ore miner Fortescue Metals adding 15 cents to $5.30.
Oil and gas explorer Drillsearch Energy jumped nine cents, or 6.3 per cent, to $1.52 after increasing its 2014 production guidance by around a million barrels.
Atlas Iron added 9.5 cents, or 9.95 per cent, to $1.05 after the company also lifted its full year production guidance.
Engineering firm Forge Group dumped eight cents, or 8.9 per cent, to 82 cents after after it flagged an annual loss of up to $25 million.
Among the major banks, Commonwealth Bank lifted 79 cents to $74.92, National Australia Bank found 27 cents to $33.60, ANZ picked up 23 cents to $30.37 and Westpac improved 42 cents to $31.20.
The broader All Ordinaries index was up 52.6 points, or 1.01 per cent, at 5240.6 points.
The March share price index futures contract was 43 points higher at 5176 points, with 22,762 contracts traded.
National turnover was 1.54 billion securities worth $4.05 billion.