Turkish stocks down nearly 5%, but lira recovers from earlier losses after failed coup attempt

Turkish stocks down nearly 5%, but lira recovers from earlier losses after failed coup attempt
Istanbul Stock Exchange
By bne IntelliNews July 18, 2016

Turkish stocks fell 4.7% and the yield on the benchmark 10-year local currency government bond rose to 9.3% on July 18, after the country’s markets opened for the first time since the failed coup attempt on July 15. Bond yields stood at 8.89% on July 15.

The lira, however, paired some of its earlier losses, gaining 2% against the greenback on July 18 to trade at 2.9546. At its weakest point on July 15, the lira weakened to as low as 3.0476 against the dollar.

Turkey's central bank acted quickly on July 17 before the opening of the markets announcing a number of measures to assure investors. It said it would provide banks with liquidity without limits. All measures will be taken to ensure financial stability, if deemed necessary, the central bank said in a statement on its website

“Market reaction largely as expected - i.e. muted, given coup put down and order restored by Erdogan and his supporters,” Tim Ash at Nomura said in an emailed comment on July 18. The clear-out of conspirators will likely be confined to the Gulenist clique, and importantly leaving Turkey's secular business, and political elite untouched, according to Ash. “This still further underlines Erdogan's authority and dominance over domestic politics, and will further the move to an Executive Presidency which raises more issues over long term growth and development,” he suggests.

Capital Economics analysts argue that the near-term economic impact of the attempted coup will depend on the length and severity of market dislocation. “But at the very least the economy is likely to suffer a period of slower growth, and the lira will remain under pressure”, they say. According to Capital Economics, while it’s still too soon to draw firm conclusions, the early signs are that it may result in a further centralisation of power in the presidency, which could ultimately lead to a slower and more volatile growth path. 

Later in the day, Turkish stock extended the losses dropping 7.1% at 5:30pm local time on July 18, led by a 10% decline in bank shares as the post-coup worries are keeping investors at the edge of their seats. Statements from government officials suggesting that death penalty could be reintroduced also weigh on investor sentiment as such a move will dent Ankara’s EU aspirations.

Yield on 10-year local currency government bond rose sharply to 9.49% at 3:30pm local time but later edged down to 9.42%. The lira lost some 1.5% against the dollar to trade at 2.9680 per dollar. The economy is likely to suffer a period of slower growth, and the lira will remain under pressure, Capital Economics said in a comment on July 18.

The attempted coup in Turkey and the authorities' reaction highlight political risks to the country's sovereign credit profile, Fitch Ratings said on July 18. “Whether this translates into sovereign ratings pressure will depend on the extent to which the government's reaction deepens political divisions and weakens institutional independence,” the ratings agency suggested. The political fallout could refocus attention on Turkey's large external financing requirement if it results in significantly diminished international investor confidence, Fitch warned.

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