Turkey's main stock market index hit a fresh high on May 7 the day after closing at a record high, on the back of continuing optimism over a second upgrade of the sovereign to investment grade, the Kurdish peace process, progress in renewing relations with Israel and the likelihood of another rate cut from the central bank.
Less than a week after setting its last record on May 2, Turkey's main stock index the IMKB 100 closed at a new high of 89,950 on May 6. The next day, it peaked at 90,373 during morning trade, on optimism ahead of first quarter results from major banks Yapi Kredi and Isbank, reports Reuters.
Turkey's banks have been at the forefront of the rally, as they are on the frontline of beneficiaries of low bond yields, which are being pushed both by the ongoing emerging markets debt rally and by the Central Bank of Turkey's (CBT) recent policy to lower benchmark rates. The central bank said on May 6 that the lira's real exchange rate rose to 121.10 in April. Governor Erdem Basci said last week the bank would consider trimming short-term rates if the indicator topped 120.
Meanwhile, the Kurdistan Workers Party (PKK) is due to start the withdrawal of militants from Turkish territory on May 8, with optimism rife that this latest peace process will prove sturdy enough to finally end the 30-year conflict. At the same time, Turkey and Israel, the two leading powers in the region, are moving - albeit slowly - towards sealing better relations following a period of bitter recrimination in the wake of the Mavi Marmara incident in 2010. A second round of talks aimed at normalizing relations began in Jerusalem on May 6.
The market is also betting that Moody's Investors Service is likely to follow Fitch Ratings in upgrading the sovereign debt rating. Analysts spoke of a market swirling with "euphoria" late last year after the latter handed Turkey its first investment grade rating for close to 20 years. The mood was only lifted last week as delegations from both Moody's and Standard & Poor's visited Turkey, prompting Economy Minister Zafer Caglayanby to announce that he expects an upgrade soon. The criteria of many of the globe's largest investment funds demand investment grade from at least two major ratings agencies before they will invest.
Therefore, that is clearly the key step; but not everyone is convinced. In fact, there have been few hints from Moody's that it's ready to make such a move, with the rating agency instead appearing to be happy to continue its stated stance of watching the progress of Ankara in dealing with the current account deficit. Meanwhile, the market appears to have discarded the S&P delegation's concerns about the high level of Turkey's short-term debt. The agency also warned that although it is "aware of some of the liquidity that has the potential to flow into Turkey ... this is hot money in the end."
While the "soft landing" engineered last year by the government dampened demand for imports, thus reducing the current account deficit, which in turn exposes the country heavily to external risk - and mostly the shaky Eurozone banking sector which provides most of the funding to cover it - the central bank is still struggling via a complex policy mix to rein in domestic demand without constraining wide economic growth.
One of its recent measures - the "Reserve Option Mechanism" - has seen around $45bn of gold and foreign exchange held at the CBT against lira liabilities. However, William Jackson of Capital Economics writes in a note that "[i]n spite of the rapid build up of Turkish banks' foreign currency assets held at the central bank, we think the country's banking sector is still more vulnerable to an external shock now than it was on the eve of the 2008/09 global financial crisis."
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