Escalating Turkish Violence Spurs Biggest Stock Rout, Lira Sinks

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The lira headed for a one-month low and stocks sank the most in the world after a Turkish soldier was killed in a shootout with Islamic State militants on the Syrian border, deepening security concerns.

The clashes at the border in Turkey’s Kilis province were ongoing after gunfire from Syria killed the soldier, state-run Anadolu reported. The lira depreciated 1 percent versus the dollar, while yields on the government’s two-year notes climbed to a three-week high.

Stocks retreated the most since the ruling AK Party lost its majority in the June 7 elections, throwing the country into a political impasse over the formation of a government. The shootings Thursday come three days after a suicide bomb killed 32 Turks amid skirmishes between Kurds and Islamic State militants.

The market is closely following “developments in Turkey following recent tragic events in the southern part of the country,” Piotr Matys, a London-based foreign-exchange strategist at Rabobank, said by e-mail. “Political uncertainty fueled by lack of progress in coalition talks is definitely weighing on the lira.”

The currency is the third-worst performer among its peers in 2015 as the dominant Justice & Development Party struggles to form a coalition government.

In a separate incident on Thursday, one police officer was killed and another was left in serious condition after a shooting in the southeastern city of Diyarbakir, Haberturk reported.

‘Important Support’

The Borsa Istanbul 100 Index slid below 80,000 points, a technical support level according to some analysts, for the first time since June 16. The gauge was the biggest loser among 93 global equity indexes tracked by Bloomberg.

Earlier today, Turkey’s CHP lawmaker Ozgur Ozel called for an extraordinary parliamentary meeting on June 29. A premature vote is more likely than the formation of an alliance, opposition CHP leader Kemal Kilicdaroglu said in an interview with Yeni Safak newspaper.

Deniz Baykal, a former leader of the same party, predicted the country will hold elections in November, Ihlas News Agency reported. Coalition talks are “nothing more than theater,” and the AK Party “doesn’t want to form a government,” he said.

The call for the meeting “may have lowered investors’ optimism about a coalition government,” Ayse Iyigundogdu, an institutional sales manager at Teb Yatirim Menkul Degerler AS said by e-mail.

Rates Held

Turkiye Garanti Bankasi AS and Akbank TAS, the nation’s biggest publicly listed lenders, slid 3.1 percent and 2.7 percent, respectively.

The yield on two-year government notes jumped 17 basis points to 9.95 percent, extending the increase to 193 basis points this year, the most among 21 emerging markets tracked by Bloomberg.

The prospects for higher U.S. rates has also heightened concern over the safety of Turkish assets.

Morgan Stanley, which labeled the country as one of the so-called Fragile Five nations most-vulnerable to a tightening of U.S. monetary policy, cut Turkey’s sovereign credit recommendation to underweight from market-weight in a report dated yesterday, citing “deteriorating external conditions.”

The central bank kept Turkey’s one-week repurchase rate at 7.50 percent for a fifth month on Thursday, in line with the median estimate in a Bloomberg survey of 18 economists. Policy makers also maintained the overnight lending and borrowing rates at 10.75 percent and 7.25 percent, respectively.

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