Turkish markets continued to rally last week as investors interpreted results from the recent municipal election as a vote of confidence for the ruling AK Party government.
Markets were up sharply across the board bringing the benchmark, Borsa Istanbul 100 Index, up over 15 percent in the last two weeks and the Turkish lira improved by 6 percent against the U.S. dollar and the euro. This week markets will turn to talk of quantitative easing at the European Central Bank (ECB) and market data to be released on Tuesday.
The post-election rally in the Turkish markets made a "market-risk-free" pair-trade of short-Dow Jones Industrial Average (DJIA) and long-BIST 100, the most profitable pair against U.S. markets in the last two weeks worldwide. This pair would have yielded investors that believed in the over performance of Turkish markets with a hefty 20.5 percent return in the last two weeks in U.S. dollar terms. Such a return eclipses the 13 percent return of the DJIA over the last year, despite it being a most impressive rally. Last week's release of the consumer price index and producer price indices calmed fears of runaway inflation as both numbers came in close to their predicted numbers. The Consumer Price Index or "headline inflation," as it is more commonly known, came in at 8.39 percent year-over-year which isn't surprising based on increased energy prices. The Producer Price Index also came in near flat, meaning the increase in price of manufactured goods was stable.
The benchmark two-year Turkish Government Treasury Bond continued to rally as yields decreased to their lowest levels since December of last year, sitting at 10.34 percent at 2pm Monday while the 10-year long end Treasury bond traded stably at 10.28 percent.
Turkish bonds were helped by rumors coming out of the ECB. Talk of ECB easing began Thursday of last week as its president, Mario Draghi, disclosed inflation in the Eurozone to be at 0.5 percent and that this threat of no inflation or a beginning of deflation could force the ECB to implement a negative interest rate or a bond-repurchasing program such as the quantitative easing execute by the U.S. Federal Reserve.
Draghi went on to say that the ECB was unanimous in its commitment" to use "unconventional instruments" to check such low inflation, meaning even the German Bundesbank, traditionally against any action that could be inflationary, joined the other members of the Bank in support for potential easing.
Turkish sovereign debt was viewed as less risky than Credit-Default Swaps traded at 2.09 percent at midday Monday, down from a high one week before the election when they were trading at 2.68 percent. This shows that foreign investors that want to insure themselves against default risk in Turkey endorsed the strong showing of the AK Party very optimistically. This week industrial production numbers will be released Tuesday at 10 a.m. followed by the current account balance numbers on Friday at 10 a.m. Markets have priced stability into current levels but are also poised to jump higher if data shows improvement in production numbers. The current account balance should have improved because of increased prices of imports in TL terms and cheaper exports.
Any surprise here will move markets.
Another key indicator that shows promise for Turkish markets is the Central Securities Depository's foreign ownership of Turkish securities index. The MKK, as the depository is known in Turkey, recently released data which shows this percentage jumped to over 63.5 percent from a multi-year low of 61 percent prior to the election. This is a very strong indicator that foreign investment in Turkish financial markets will continue where it left off. The index had been at 66.5 percent in May of last year but fell sharply one week before the "Gezi protests," on news of potential tapering by the U.S.
Fed, or a decrease in bond repurchasing by the Federal Reserve. Therefore, the largest protests in recent Turkish history were immediately led by the largest exit of foreign investors from Turkish markets in recent history, a fact little-known domestically.
The strong showing of public support of the ruling AK Party government by the people will most likely lead to the successful election of AK Party's choice to be the next Turkish president, which will lead to further political stability and a rally in Turkish markets by the end of the year.
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