Turkish Stocks Slide Most in 5 Months on Mounting Political Risk

  • Parliament row may hurt investor sentiment: Capital Economics
  • Bonds fall, sending 10-year yields to three-week highs

Turkish stocks dropped the most in five months and bonds declined with the lira as political turmoil intensified and a selloff in riskier assets gathered pace.

The Borsa Istanbul 100 Index slid 3.3 percent, the second-biggest decline worldwide, after a parliamentary committee agreed late on Monday to remove the legal immunity of lawmakers accused of supporting the separatist Kurdish PKK, designated a terrorist group by Turkey, the U.S. and European Union. The measure still needs to be passed by the assembly to become law. Stocks extended losses as Kurdish lawmakers threatened to set up an autonomous parliament. Yields on 10-year bonds climbed to the highest in almost three weeks on Tuesday.

The action in parliament comes after the ruling AK Party board stripped Prime Minister Ahmet Davutoglu of his powers to appoint leaders to the party’s local organizations on Friday, reducing his authority and empowering loyalists of President Recep Tayyip Erdogan. Goldman Sachs Group Inc. said the decision was “one of the clearest signs yet of tensions” between Davutoglu and Erdogan, who wants an executive presidency.

“The politics in Turkey is becoming an increasing concern to investors,” said William Jackson, a London-based analyst at Capital Economics Ltd. “The growing authoritarian streak in the AK party is worrying. These scuffles in parliament could have affected investor sentiment. It highlights the risks.”

The threat by Kurdish lawmakers followed the parliamentary committee’s move yesterday that could put dozens of their colleagues from the Peoples’ Democratic Party, or HDP, on trial. HDP co-chairman Selahattin Demirtas said legislators from his HDP party wouldn’t agree to be tried in government courts.

The Istanbul 100 index fell the most since Nov. 24 in the second-biggest decline among more than 90 benchmark indexes tracked by Bloomberg. The gauge extended its three-day decline to 5.2 percent. The 10-yield climbed 21 basis points to 9.46 percent and the lira slid 1.4 percent to 2.8450 versus the dollar at 5:53 p.m. in Istanbul.

Turkey joined a retreat in emerging markets that sent a global equity gauge down the most since February amid evidence of lackluster economic growth worldwide cut demand for riskier investments. Investors also shrugged off data showing Turkish inflation slowed in April to the lowest level in three years. 

Low Demand

“There is negative sentiment in global financial markets today,” Jackson said. “Turkey is more dependent on foreign capital than most emerging markets so it is very sensitive to changes in global risk appetite.”

Turkish stocks have rallied 13 percent this year as the Federal Reserve has become more cautious about tightening U.S. monetary policy, boosting appetite for emerging-market assets. Overseas investors poured $4 billion into Turkish stocks and bonds this year through April 22, the biggest inflow for the period since 2013.

Investors bid for 1.36 times the 960 million liras ($339 million) of 10-year bonds sold at a yield of 9.33 percent on Tuesday, the lowest bid-to-cover ratio since June.

Low demand at the auction today “will likely lead yields higher,” Erkin Isik, a strategist at Turk Ekonomi Bankasi AS, said by e-mail. “Most of the positive news in Turkey is already priced in. Inflation’s decline on a base effect and food prices are most likely over, positioning is not light anymore and political tension is more likely to increase.”

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