Turkish president Tayyip Erdogan's opponents faced an uphill struggle to end his two-decade rule on Monday after he performed better than expected in a first round of voting but fell short of an outright majority, leaving the contest to a runoff.
MARKET REACTION:
LIRA: The Turkish currency touched a two-month low of 19.70 at the session's open, not far off the lowest level hit this year following deadly earthquakes in February. It was last at 19.66 to the dollar, set for its worst trading session since November.
DEBT: Five-year credit default swaps jumped over 100 basis points from Friday and dollar bonds fell more than 7 cents.
STOCKS: Borsa Istanbul issued a market-wide circuit breaker after the benchmark index (.XU100) dropped 6.38% in pre-market trading and was last down 2.7%.
COMMENTS:
HASNAIN MALIK, TELLIMER, DUBAI:
"For bulls on Turkish assets, expectations have quickly shifted from a possible outright win for Kilicdaroglu in round one to, at best, a split government should he win round two, given Erdogan's People's Alliance has won a majority in parliament, and, at worst, another mandate for Erdoganomics.
"Without any reversion to orthodox economic policy, which would carry its own painful corrective steps in the short-term, the investment case in Turkish local currency assets remains trapped in a debate as to whether devaluation is sufficient to reflect market-unfriendly interest rate policy."
ONUR MUMINOGLU, CREDIT SUISSE, ISTANBUL:
"Markets read-across: No clear outcome from the presidential votes this morning implies pending macro/political uncertainty potentially for the following two weeks (at least)."
"We note that more domestically oriented sectors, such as banks, retailers or large-cap diversified conglomerates ... may be perceived as higher beta to macro/political developments, whereas investors may monitor FX:lira trends for industrial exporters."
RICHARD BRIGGS, SENIOR FUND MANAGER, CANDRIAM, LONDON:
"The currency has barely moved given local intervention and if President Erdogan remains in power that will likely remain the case near term, but at the cost of large interventions by the central bank and local banks, which will create greater imbalances for Turkey to solve when the time comes."
HIMANSHU PORWAL, EM CREDIT ANALYST, SEAPORTGLOBAL, LONDON:
"Erdogan win – markets sell off, as BOP (balance of payments) does not add up, Erdogan will not hike rates in defence of the lira, so its either a) call a friend (Putin, MBS, MBZ) to get more FX reserves to defend the lira; b) capital controls; c) let the lira sink. I think he does the latter and I think we see real macro-financial risks building here. Risk of bank runs, et al, before Erdogan relents and hikes rates. Lira sinks to 35+, Turkey credit back near record highs."
"Erdogan has lots of fiscal space still to bank roll, and he has done so much already with huge hikes in pensions, the minimum wage, benefits, and public sector salaries"
MOODY'S ANALYSTS:
"Another term for President Erdogan would likely imply a continuation of the current unorthodox and unsustainable policies and macroprudential measures with a heightened risk of persistent very high inflation and severe currency pressures.
"By contrast, a victory for Kemal Kilicdaroglu ... would improve the prospects for a return to orthodox economic policies which – if effectively implemented – would be positive for the sovereign’s credit profile over the longer term.
"However, unwinding the distortionary measures put in place over the past two years will be challenging and the risk of policy missteps, as well as economic and financial volatility in the interim is significant."
MEHMET BAKI ATILAL, ASSISTANT GENERAL MANAGER OF RESEARCH, A1 CAPITAL, ISTANBUL:
"The market does not like uncertainty, the sale of the shares bought last week in an environment of uncertainty, especially on the banking (sector) did not surprise me.
"There is a fall in BIST, it will try to consolidate itself in the 4400-4300 band. The market will look at the names (policymakers) in the economy and what the policy will be, and then we expect it to rise."
ELLIOT HENTOV, HEAD OF MACRO POLICY RESEARCH, STATE STREET GLOBAL ADVISORS, LONDON:
"Given that Erdogan goes into runoff period a little bit with tailwinds and can be a bit more relaxed about the outcome, the next two weeks would be relatively calm."
JAMES WILSON, EM SOVEREIGN STRATEGIST, ING, LONDON:
"The government are (sic) likely to focus on keeping the lira stable, so most of the shifts in market sentiment will be seen in the CDS and dollar bond space.
"The current government have been very clear in their intentions to maintain the current policy framework of low interest rates after the elections. However, we have seen signs of pragmatism in the past by policymakers when responding to crises, so more significant pressure on the lira could eventually force a policy shift for the government, at least temporarily, in order to stabilise market sentiment."
PIOTR MATYS, SENIOR FOX ANALYST, IN TOUCH CAPITAL MARKETS, POLAND:
"When/if President Erdogan is re-elected, the lira should be trading far more freely. Essentially, state banks most likely will refrain from intervening. Given that the (Turkish central bank) is unlikely to make a U-turn and won't raise rates, the lira may fall precipitously if Erdogan achieves his political goal of being re-elected."
CLEMENS GRAFE AND BASAK EDIZGIL, GOLDMAN SACHS, LONDON:
"The (rates and CDS) market dynamics post the initial move will be dependent on the FX market.
"But with the run-off only 2 weeks away and the results suggesting a better-than-expected probability of an incumbent win, it appears likely that those (FX) flows will continue and keep FX volatility contained into the second round.
"That said we do think that there will eventually have to be some adjustment in the TRY"
