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Turmoil Sends Turkey Markets to Worst Week of Erdogan Presidency

  • BofA to Commerzbank turn pessimistic on country's outlook
  • Currency volatility surges as political tensions deepen

Turkey’s stocks and bonds headed for the worst week since 2013 and currency volatility surged as a renewed political upheaval accelerated a selloff sparked by hawkish signals from Federal Reserve officials.

The Borsa Istanbul 100 Index dropped 9 percent this week and the yield on 10-year government bonds jumped 54 basis points as Prime Minister Ahmet Davutoglu lost a power struggle and said he would step down. The latest twist in what’s seen as President Recep Tayyip Erdogan’s quest for greater powers prompted Nomura Plc to say the risk of a credit downgrade may have doubled and Commerzbank AG to lower growth forecasts for this year and the next.

“The uncertainty which this transition will induce may squash investment intentions in the business sector,’ said Tatha Ghose, a senior economist at Commerzbank in London. “We had been relatively bullish about investment prospects when the AKP won clear majority in November, but this outlook has now been reversed.”

The selloff in Istanbul accelerated on news of the premier’s plans late Wednesday and continued on Thursday after his announcement. It unwound much of the optimism surrounding the nation that started with an end to a political deadlock in November and gathered pace as the central bank started lowering rates in March. The lira pared its losses on Friday after worse-than-estimated U.S. jobs data undermined bets for a Fed rate increase in June.

Declines this week were similar to those seen in the second half of 2013 when the “taper tantrum” surrounding the winding down of Fed stimulus and a bribery scandal drove investors away. A cabinet reshuffle that followed the corruption probe and the market meltdown pushed the central bank into an emergency rate hike to stem a run on the lira. Erdogan, who was then the prime minister, became president in August 2014.

Analysts and money managers are swearing off Turkish assets again.

Bank of America Merrill Lynch said the risk that Turkey may now lose its investment-grade rating at Moody’s has risen. Commerzbank lowered Turkey’s growth forecasts for this year to 3.5 percent and 2.5 percent for 2017, from around 4 percent for both years previously.

Morgan Stanley analysts including Min Dai wrote in a report they have turned bearish on local debt and recommend selling 10-year notes. The spike in currency volatility will reduce the central bank’s ability to cut borrowing costs, the analysts said. Morgan Stanley lowered its projection for a cut in the overnight lending rate this month from 50 basis points to 25, even suggesting there may be not cut at all.

Roubini Global Economics made a bearish call on the lira, citing elevated political risks. Societe General closed out its long Turkish lira recommendation against South Africa’s rand.

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