Turkey’s main stock index sank more than 20 percent from its May peak into a so-called bear market while the lira tumbled to a record against the dollar after the U.S. Federal Reserve signaled it may scale back monetary stimulus. Turkish bonds fell the most in emerging markets.
The Borsa Istanbul National 100 index slumped 6.8 percent to 73,461.89 at the close in Istanbul, down 21 percent from the May 22 high. The lira depreciated for a fourth day, falling as much as 1.8 percent to 1.9363 a dollar as the central bank held six currency auctions to support it. The currency was at 1.9334 a dollar at 5:44 p.m. in Istanbul, taking this month’s drop to 2.9 percent.
“Turkey is more vulnerable due to lingering political tensions,” Jerome Broex, a currency and fixed-income trader at Turkish Bank in Istanbul, said in e-mailed comments. “The central bank wasn’t able to cope with the dollar, but it may intervene deeper in the market over the following days.”
The rout in Turkish assets, which comes amid violent protests in the country, follows Fed Chairman Ben S. Bernanke’s statement yesterday that the central bank may end its bond-purchase program in 2014 if risks to the U.S. economy abate. Demonstrations in Turkey, which spiraled this month from government plans to develop Istanbul’s Taksim Square, have prompted investors to weigh whether the biggest drop in bond yields in emerging markets over the past year is justified.
Turkey’s central bank sold $350 million at six auctions today. The regulator also said it would vary the amount of sales rather than capping them at $50 million as it had said on June 11. The cost of protecting Turkish debt against default through five-year credit-default swaps increased 44 basis points to 207, compared with 215 basis points for Russia and Brazil.
The yield on the two-year benchmark bonds surged 80 basis points to 7.61 percent, the biggest advance on record, while 10-year yields jumped 93 basis points to 8.32 percent.
“We may see two-year yields rising to as high as 8 percent over the next few weeks, if the central bank tightens liquidity further,” Broex said. Ten-year yields may move toward 8.5 percent in such a scenario, he said.
The benchmark equity index has decreased almost 15 percent since May 31, when an environmentalist sit-in against the redevelopment of a public park in Turkey’s biggest city snowballed into nationwide protests against Prime Minister Recep Tayyip Erdogan’s government.
The two-year bond yield has soared 154 basis points since then, reducing its decrease in the past year to 140 basis points and leading Turkish bonds to fall behind Poland’s as the best-performing debt among emerging markets tracked by Bloomberg. The nation’s 10-year local-currency bonds were the worst performers in emerging markets today, the data show.
“The party’s over,” Baris Buyukdemir, general manager at Ceros Securities in Istanbul, said in e-mailed comments. “People are a bit drunk and there’s fighting at the door. When it’s over and everyone goes to bed, it’ll be fine.”
The central bank lowered interest rates last month two times more than analysts surveyed by Bloomberg expected. It cut the benchmark one-week repurchase rate by 0.5 percentage point to 4.5 percent, also cutting the top and bottom ends of its so-called interest-rate corridor by the same amount.
“Turkey has been caught in this wave of capital outflows with too low interest rates,” Bulent Topbas, an Istanbul-based fund manager at Strateji Menkul Degerler AS, said in e-mailed comments. “The Fed has changed the rules of the game.”
If the central bank concludes that its dollar auctions are ineffective in supporting the lira, the regulator may “engage in extraordinary action” such as an unscheduled meeting to raise the policy rate, Topbas said.