Turkey’s lira plunged the most in eight years, an exchange-traded fund tied to the country’s shares declined and US Treasuries ticked higher after Turkey’s army said it seized power and President Recep Tayyip Erdogan asserted that he remains in control. US stock futures slipped.
The lira lost 4.6% to 3.015 per dollar in the biggest selloff since 2008. Treasuries pared declines with the yield on 10-year notes trimming four basis points off of a six-point advance to end at 1.55% and US equity futures fell about half a percent. The yen strengthened to 104.88 per dollar after earlier falling to 106.32. The risk premium on the Markit CDX North America Investment Grade Index, a measure of credit default swaps of company bonds, jumped 2.1% to 72.84, Bloomberg reported.
The iShares MSCI Turkey ETF lost 2.5% to $41.60 by the close of US trading Friday. While US stocks closed the regular session at 4 pm little changed, futures tracking the Standard & Poor’s 500 Index slipped after word of the Turkish conflict was reported. The September e-mini contract slipped as low as 2,143.25 in New York, down about 0.5% from its level 45 minutes earlier.
The dollar was recently up 1.4% against the Mexican peso, while rising 2.5% against the South African rand and 1.3% against the Russian ruble.
Gold also made back earlier losses and was recently up 0.4% to $1,337.80 a troy ounce in aftermarket trading.
Before today, Turkey had been eastern Europe’s second-strongest stock market of the year with a 15% gain, second to Kazakhstan’s 20%. Among all markets tracked by Bloomberg, Turkey is ninth best and is outperforming all developed markets.
The military coup and ensuing market selloff in Turkey halted what had been some encouraging signs for the country’s financial position, though a terrorist attack at Istanbul’s airport last month already caused some investor concern.
Sudden Downturn
“The economy was doing well, and the fundamentals were solid, so this is totally unexpected,” said Jorge Mariscal, emerging markets chief investment officer at UBS Wealth Management.
The sudden downturn in emerging markets on Friday was a reminder that after a big rally this year, these markets are vulnerable to a pullback on any hint of bad news. With the Dow Jones Industrial Average and S&P 500 hitting record levels in recent days, US stocks could also face selling pressure next week.
“Emerging markets are places where political risk is still a major factor,” said Alvise Marino, a strategist at Credit Suisse. “The inflows we have seen lately reflect the fact that the outlook for developed markets have deteriorated, rather than the fact that emerging markets have improved.”
Turkey’s latest economic data pointed to accelerating manufacturing activities, a shrinking current deficit and improving consumer confidence.
Turkish debt has been among the best performers in emerging markets in recent months, with the 10-year bond yield falling to 8.85% from 11% earlier this year. In May, Turkey’s bond market attracted a net inflow of $2 billion, the largest monthly inflow in many months.
Some investors cautioned against overreacting to the Turkish situation. Low and negative bond yields in developed markets and continuing fallout from Britain’s vote to leave the European Union make much of the world unappealing for investment, said Peter Lannigan, managing director and head of emerging markets strategy at Cowen & Co. LLC in Stamford.
“At the end of the day, you still have central banks pushing down yields in developed markets,” he said. That makes emerging markets with their higher yields more appealing, he added.
Turkey’s stocks may fall as much as 20%, regardless of the political outcome, according to Emad Mostaque, a London-based strategist at emerging-markets consultancy Ecstrat Ltd.
