Sour end to the week for Turkish lira and Istanbul stock exchange

Sour end to the week for Turkish lira and Istanbul stock exchange
By Akin Nazli in Belgrade October 5, 2018

Short periods of recovery enjoyed by the Istanbul stock exchange and the Turkish lira (TRY) appear to be over, with both coming under pressure again as the week drew to a close.

The TRY was again feeling the heat on October 5, during which William Jackson of Capital Economics put out a research note observing that the sell-off could deepen next week if the latest court hearing concerning jailed US pastor Andrew Brunson prompts a fresh escalation of tensions with the US.

“There had been signs of a cooling of tensions in recent weeks, including suggestions that pastor Brunson will be released [at the next court hearing to be held on October 12]. Anything that comes out of the hearing that dents hopes for a swift resolution to the skirmish could place the lira under further pressure,” Jackson said.

Borsa Istanbul began this year with bounce, with the benchmark BIST-100 index climbing to its all-time high of 120,845 through the end of January. However, as Turkey’s currency crisis and other economic woes mounted, the index gradually fell to as low as 84,654 by August 17.

Another driver of its decline was changing global sentiment triggered by the US Fed stepping up its monetary tightening. With inflationary fears in the US in the past couple of days leading to renewed anxiety that American interest rates will rise more quickly than previously expected—strengthening the dollar, pushing up US Treasury yields and making emerging markets less attractive for hot inflows of international capital—the BIST-100 is once more suffering the wobbles. Although a spell of growing investment appetite for cheaper Turkish assets pushed the index back over the 100,000-level during the last trading days of September, it lost 7% in the first week of October.

Rising oil prices also served to push up US Treasury bond yields to uncomfortable levels for emerging markets seeking portfolio investments, while they are also a headache for the Turkish economy given that Turkey imports almost all its energy.

On October 4, the BIST-100 lost 3% d/d and it had edged down a further 0.05% d/d to 94,438 as of 17:00 local time on October 5. Since the end of 2017, the index has fallen 6%. Its year on year decline stands at 18%.

“The currency [Turkish lira] is down by about 3% against the dollar since the start of Wednesday. Much of the weakness appeared to coincide with Thursday’s release of the central bank’s comment on September’s inflation figures [standing at a 15-year-high],” Jackson also said, adding: “It’s not quite clear why that might have spooked the markets, although the sell-off did also follow a sharp rise in US Treasury yields the night before—highlighting once again Turkey’s vulnerability to tighter external financing conditions.”

Rising volatility
The rising volatility on the Borsa Istanbul is making it harder for analysts to explain its fluctuations, but it provides greater opportunities for short-term traders. However, given the macroeconomic indicators pointing to the beginning of a steep recession in Turkey along with rising concerns over the private sector’s debt repayment capabilities, it is hard to expect a positive U-turn leading to long-term upward momentum.

Fitch Ratings said on October 1 that the performance, asset quality, capitalisation and liquidity and funding profiles of Turkish banks were now more likely to come under pressure as a result of a further depreciation of the TRY (by around 20% against the USD since Fitch’s last rating review on July 20), the spike in interest rates (driven by the increase in the policy rate to 24% from 17.75% on September 13) and the weaker growth outlook. At the same time Fitch  downgraded the Long-Term Foreign-Currency Issuer Default Ratings (LTFC IDRs) of 20 Turkish banks and their subsidiaries.

Wounding bullets from the rating agencies have been hitting Turkey one after another for around two years now, and at an escalating pace.

Turkish equities experienced a net outflow of $71mn in September, according to the latest data from the central bank.

Total outflows from the Istanbul stock exchange have amounted to $1.33bn since the beginning of 2018. The bourse's total equities inflow in 2017 topped $3.34bn, in line with the scope of portfolio inflows recorded for the emerging markets universe.

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