Market tumble in Turkey expands into second day following new cabinet announcement

Market tumble in Turkey expands into second day following new cabinet announcement
Turkey's currency has been hit hard by investor qualms over the country's direction / bne IntelliNews
By bne IntelliNews July 12, 2018

Turbulence that begin in Turkish markets after President Recep Tayyip Erdogan’s (RTE) announced late on July 9 his new cabinet under full blown “Turkish-type” presidency system expanded into a second day on July 11.

The initial market reaction to Erdogan’s new cabinet was also negative on July 10. Markets especially did not like the appointment of RTE’s son-in-law Berat Albayrak as finance minister, replacing former economy head and investors’ darling, Deputy Prime Minister Mehmet Simsek and former market-friendly Finance Minister Naci Agbal, who were widely seen by investors as one of the few top Turkish officials who could rein in RTE’s unorthodox obsessions.

Albayrak said on July 10 that Turkey will work to lower inflation to single digit. “Independent institutions will be more successful and Turkey will have stronger monetary policy,” Albayrak also said in an obvious attempt to placate the worst fears that Erdogan is going to take personal control of monetary policy.

However, the threat of institutional sclerosis looms large as “true competition about positions and ideas in Turkey’s government is increasingly replaced by yes-sayers and Erdogan-loyalists,” Wolf-Fabian Hungerland of Berenberg in London told Bloomberg.

Also on July 10, RTE has done what investors into Turkey feared the most: he has taken sole control of the appointment of the central bank governor, deputies and monetary policy committee (MPC) members for a 4-year period, according to a presidential decree published on the day.

“Turkish President Recep Tayyip Erdogan unfortunately is a man of his word. He promised to take greater control of monetary policy during the election campaign, and he has wasted no time in doing so. He has snipped the last threads in Turkey’s safety net — and he has made his nation all but uninvestable,” Marcus Ashworth wrote in his latest column for Bloomberg.  

“Nonetheless, we reiterate our stance that the Turkish currency will be among the best performers in the second half of 2018. We use different models such as LPPL and volatility modelling to support this view,” Sebastian Petric of RBI Vienna said in research note, in contrast to the market consensus expectations.

“Turkish government bonds outlook may remains clouded by domestic politics which could limit the scope of yield tightening in very short-term. At the same time a 5s10s spread at 114bp for Turkish bonds deviates 33bp from its 3m average which makes 5y bonds look more interesting in current situation,” Raiffeisen Research said in a separate research note.

The lira tumbled from 4.55 to 4.73 to the dollar within an hour of RTE’s cabinet announcement on late hours of July 9 — falling more than on the eve of the coup attempt against Erdogan two years ago.

On July 11, lira saw as high as 4.7619 and it was trading at 4.7493, up 0.89% d/d, as of 13:00 local time.

Benchmark BIST-100 index has also lost further by 2.29% to 94,068 as of 13:00 on July 11 after falling 3% d/d on July 10.

The index saw its historically highest level of 121,531.5 during intra-day trading hours of January 29 before gradually descending to 92,721 on June 18. BIST-100 has followed a rising trend to as high as 100,808 on July 9 since then, especially after the June 24 snap polls ended in the first round.

Yield on 2-year benchmark domestic bonds saw 20.51% on July 10 while 10-year benchmark yield tested a fresh record high of 17.84%.

2-year yield stood at 20.30% as of 13:00 on July 11 while 10-year yield was testing a fresh record high of 18.05%.

 

 

 

Data

Dismiss