Turkish Markets Fall on Brexit Rout While Rate-Cut Bets Unwind

Updated on
  • Yield on 10-year debt has biggest jump since January
  • Stocks fall most since November, lira exceeds 3 per dollar

Turkish assets slid after the U.K.’s vote to leave the European Union roiled world markets and threatened to undermine the confidence of the international investors it relies on to finance its current-account deficit.

The Borsa Istanbul 100 Index fell 3.4 percent, its biggest drop since November, while the yield on 10-year sovereign bonds jumped 28 basis points, the most in more than five months. The lira trimmed losses on speculation the turmoil could prompt policy makers to delay a cycle of interest-rate cuts.

Turkey is vulnerable to shift in investor sentiment because it depends on foreign investment to finance a current-account shortfall projected by economists to widen to 4.7 percent of economic output this year, the third-biggest gap among the Group of 20 nations. The country’s markets are also sensitive to economic disruption in the EU, with Germany and the U.K. its biggest export destinations. It ranks second among emerging markets by financial ties to Britain, according to a Unicredit SpA analysis.

"Turkey may be the most affected emerging market by the ‘Leave’ vote," UBS analysts including Geoff Dennis said in a research note on Friday, citing "a vulnerable currency due to a still-wide external deficit, and its large share, the highest amongst emerging markets, of exports going to the U.K."

Turks hold about 44 percent of their bank deposits in foreign currencies, according to banking regulator data. Households and businesses have acted as a backstop for the lira by converting their foreign exchange when the lira weakens.

The cost of insuring Turkish debt against default over five years jumped the most since September, with credit default swaps increasing 18 basis points to 259, according to indicative prices compiled by Bloomberg. The lira slid 2.5 percent to 2.9260 per dollar as of 7 p.m. in Istanbul, after weakening past 3 for the first time in a month.

The nation’s central bank may now be thwarted in its aim to reduce borrowing costs having already cut the overnight lending rate 175 basis points since March, UBS said.

While the lira is under pressure from traders unwinding bets they made based on their expectations of a remain vote in the U.K., a forced delay to further policy easing may help it outperform other currencies over the medium term, according to Luis Costa, a London-based strategist at Citigroup Inc.