Turkey’s lira plunged the most in eight years, an exchange-traded fund tied to the country’s shares declined and US Treasuries ticked higher after Turkey’s army said it seized power and President Recep Tayyip Erdogan later asserted that he remains in control. US stock futures slipped.
The lira lost 4.6% to 3.0157 per dollar in the biggest selloff since 2008. Treasuries pared declines with the yield on 10-year notes trimming four basis points off of a six-point advance to end at 1.55% and US equity futures fell about half a percent. The yen strengthened to 104.88 per dollar after earlier falling to 106.32. The risk premium on the Markit CDX North America Investment Grade Index, a measure of credit default swaps of company bonds, jumped 2.1% to 72.84.
“This is an unexpected political shock,” Jorge Mariscal, the New York-based chief investment officer for emerging markets at the wealth management unit of UBS Group, said by phone.
“The only conclusion is that there’s going to be more political turmoil. A lot of money has flowed to Turkey. Some of that will reserve. We are going to see some currency weakness when things settle down.”
The iShares MSCI Turkey ETF lost 2.5% to $41.60 by the close of US trading yesterday. While US stocks closed the regular session at 4pm little changed, futures tracking the Standard & Poor’s 500 Index slipped after word of the Turkish conflict was reported. The September e-mini contract slipped as low as 2,143.25 at 4:45 p.m. in New York, down about 0.5% from its level 45 minutes earlier.
“I don’t think this is likely to result in a major change in the assessment of risk in the global markets,” Jeffrey Kleintop, chief global investment strategist at Charles Schwab & Co, said by phone. “Clearly, there’s a focus on that part of the world with what’s going on in Syria, but I don’t think this is another shock for the markets akin to Brexit. Given history this is a much more minor event.”
Violent clashes continued around Erdogan’s palace in Ankara. Tanks have rolled through the streets of the capital as well as in Istanbul, and warplanes buzzed low over the cities.
Before today, Turkey had been Eastern Europe’s second-strongest stock market of the year with a 15% gain, second to Kazakhstan’s 20%. Among all markets tracked by Bloomberg, Turkey is ninth best and is outperforming all developed markets. The economy expanded 4.8% in the first quarter, beating economists estimates, as household increased spending.
Turkey’s stocks may fall as much as 20%, regardless the political outcome, according to Emad Mostaque, a London-based strategist at emerging-markets consultancy Ecstrat Ltd.
“Even if this coup fails, it is a disaster for Turkey where the risk premium on the political side must move up sharply,” as Erdogan’s Justice and Development Party, or AKP, stamps out oppositions, Mostaque wrote in a note to clients. “A successful coup would not be much better for vital foreign investor interest as the AKP has significant ground support from hundreds of thousands of vehement supporters.”
Since 1960, the NATO member has experienced at least three takeovers by the secular-minded army. But since the Islamist-rooted AK Party government came to power in 2002, the political influence of the military has been trimmed. The last time the military forced out the government in Turkey, in 1997, the benchmark Borsa Istanbul 100 Index benchmark fell 15% in the next three trading days. The index then resumed its rally and ultimately gained 254% that year.
The lira selloff spread to other high-yielding emerging-market currencies in the final trading in New York. South Africa’s rand dropped 2.4% while the Mexican peso lost 1.4%.
“Turkey is a geopolitical hot spot,” said Timothy Ghriskey, who helps manage $1.5bn as chief investment officer at Solaris Asset Management in New York. “The financial markets react very quickly to headlines like these, and it’s all about reducing risk.”
The political turmoil leaves Turkey’s economy vulnerable because it relies on foreign investment to finance a current-account shortfall. The deficit will widen to 4.5% of gross domestic product this year, from 4.4% in 2015, according to economists surveyed by Bloomberg.
“Turkey has a large external borrowing requirement and is coming off the back of a hefty credit boom,” wrote Neil Shearing, chief emerging markets economist at Capital Economics in New York. “Against this backdrop, a prolonged period of political instability could trigger a serious downturn in the economy.”
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