Turkey’s currency, stocks and bonds tumbled on Wednesday after authorities detained President Tayyip Erdogan’s main political rival on charges including corruption and aiding a terrorist group, in what the opposition called “a coup attempt.”
The move against Ekrem Imamoglu, the popular mayor of Istanbul, appears to cap an aggressive months-long legal crackdown on opposition figures across the country which has been criticised as a politicised attempt to silence dissent.
MARKET REACTION:
FOREX: The lira fell by as much as 14.5% at one point before paring some losses to trade down 7.4% at 39.40 to the dollar.
BONDS: The 2045 dollar bond shed 1.6 cents in price to be bid at 85.078 cents, its largest one-day fall since early 2024.
STOCKS: Turkish blue-chip stocks (.XU100) fell by nearly 6%, set for their worst daily performance since late 2023.
COMMENTS:
WOLFGANO PICCOLI, CO-PRESIDENT & DIRECTOR OF RESEARCH, TENEO, LONDON:
“We will have to wait and see if Turkey is heading toward a political environment more similar to Russia, in terms of democracy and elections. This is not just an assault on political opposition, but also on key business groups that traditionally play a significant role in the country’s economy.”
WILLIAM JACKSON, CHIEF EMERGING MARKETS ECONOMIST, CAPITAL ECONOMICS, LONDON:
“The sharp drop in the Turkish lira … will complicate the central bank’s task of bringing inflation down and raises big questions about the government’s ability to sustain investor confidence in its macro reform agenda.”
“In the very near term, this creates a major headache for the central bank. Inflation will probably accelerate this month, and policymakers will probably have to pause the monetary easing cycle when they meet in April (rather than reduce rates by another 250 basis points).”
NICK REES, HEAD OF MARCO RESEARCH, MONEX EUROPE, LONDON:
“This is a bit of a shock to the system – the trend, at least recently, has been toward greater stability, whether that be economic or political. Bearing in mind that just recently the leader of the PKK Öcalan, delivered a call for the group to lay down their arms – the arrests of opposition political leaders flies in the face of the trend.”
“From a market perspective, traders had become increasingly complacent, and that spell has now been broken, with dramatic results as traders reprice Turkey’s political risk premia, triggering this morning’s sharp lira selloff.”
“Now the big question is whether policy orthodoxy in Turkey is under threat. My base case is still no on balance, but risks that this marks a step away from policy orthodoxy have arguably risen. After all, it is reasonable to assume that norm breaking in one area could translate into norm breaking in other respects.”
FRANTISEK TABORSKY, EMEA FX AND FIXED INCOME STRATEGIST, ING, LONDON:
“(Turkish) bonds and FX are coming under pressure after a potential presidential candidate, the mayor of Istanbul, was arrested.
The lira is the most heavily positioned carry trade in the EM space at the moment in our view and a sharp move could potentially lead to further outflows. On the other hand, we should see local banks providing some FX support.”
TIMOTHY GRAF, HEAD OF MACRO STRATEGY EMEA, STATE STREET, LONDON:
“We were seeing people start to rebuild those positions (in Turkey) a bit. They weren’t aggressively long the lira… but they had built those positions back up.”
“After a couple years of sentiment improving and thinking that there’s more independence in the political process as well as in the monetary policy process, it’s just a major questioning of that.”
“It’s a natural ‘sell-EM’ (emerging markets) type of view, because you had one assumption yesterday, and that assumption is being challenged.”
JANE FOLEY, HEAD OF FX STRATEGY, RABOBANK, LONDON:
“The news from Turkey is having an impact on G10 currency markets and risk appetite in general, but I would think some of the initial impact of what’s happened will begin to filter out from some of the euro trade once the market has become a bit more accustomed to it.”
“Turkey is close to Europe, and has a very large army, so there was this perception perhaps with Trump moving away from NATO maybe there would be a little more focus on Turkey.”
Source: Reuters.com