Turkish assets unaffected by failed coup
Turkish stocks fell over eight per cent and bond yields rose on Monday when the country's markets re-opened after Friday's foiled coup, though there was little sign of significant contagion into other emerging assets.
On Friday night, a group of rebel soldiers attempted to topple President Tayyip Erdogan but the bid was thwarted. Despite the swift resolution and a host of reassurances from Turkish policymakers, Turkish stocks posted their biggest daily fall in 2-1/2 years. Tourism-related stocks fared worst, with airport operator TAV down 11 per cent and Turkish Airlines falling almost eight per cent. Investors demanding a higher risk premium pushed yields higher and prices lower in local and dollardenominated bonds, while the cost of insuring exposure to Turkish debt also jumped.
"A bit of political risk premium has to be repriced in the forex and bond market, this has already happened to some extent," said Murat Toprak, emerging market strategist at HSBC.
"In the near-term the political risks will be reflected in the CDS and bond markets," he said, adding he expected the yields on local debt to hit double digits. "We believe it is an exaggeration to believe the political noise in Turkey may affect the general price dynamics in other major emerging markets, especially the high-yielding ones," Citi said in a note.
South Africa's rand matched the lira's gains, while Russia's rouble added 0.5 per cent against the backdrop of unchanged oil prices and a flat dollar index. China's yuan hit a more than 5-1/2-year trough after the central bank set its daily guidance rate at its lowest since October 2010.
Emerging equity markets overall traded flat, thanks to gains in Russian and eastern European stocks. Warsaw's main index jumped 1.5 per cent to its highest in more than three weeks after Fitch late on Friday confirmed its sovereign rating as well as its stable outlook on Polish debt. Most analysts had expected Fitch cut the outlook to negative due to fiscal risks.
Meanwhile, Turkey's lira rose three per cent against the dollar on Monday, regaining much of the ground it lost after Friday's failed coup as investors took heart from government moves to regain control, though concerns simmered about the extent of the crackdown.
Traders said Monday's fall in the stock market underlined long-standing concerns over President Tayyip Erdogans' plans to concentrate more power in the top job. They are also worried that his populism might derail structural reforms.
"It is no secret that a significant portion of the investor base is very sensitive to concentration of more power in Erdogan's hands, and they will be turned off by strengthening of Erdogan's position following the coup attempt," Finansbank chief economist Inan Demir said.
The lira was up three per cent at 2.9660 against the dollar, paring the losses suffered in overseas trade on Friday, when news of the coup attempt sent it tumbling five per cent. Other traders said the market reaction had been relatively measured, given the scale of the political upheaval. "Market reaction [is] largely as expected, muted, given that the coup was put down and order restored by Erdogan and his supporters," said Tim Ash, a strategist at Nomura International. "Erdogan's authority and dominance over domestic politics... will further the move to an executive presidency which raises more issues over long-term growth and development." A proponent of consumptionled growth, Erdogan has repeatedly called for lower interest rates, even as inflation remains above the central bank's target.