Turkish financial markets rallied this past week as investors appear to believe that some regional armed conflicts have peaked.
News out of Kiev indicates a cease-fire has been agreed upon between Russian separatists and the central government in Ukraine's capital.
NATO member states along with several other countries with interests in the Middle East have come together forming a coalition to fight ISIS. Domestically, Turkish equity and debt markets rallied across the board with modest inflation numbers being reported last week.
The Kremlin has signaled it support for an agreement between the Ukrainian government and the Russian separatists and despite recent news of a potential violation of this cease-fire, the conflict in the Ukraine appears to be winding down. Both the United States and the European Union have already taken many punitive actions against Russia for seemingly supporting the Russian separatists and annexing Crimea, while Russia responded in kind, by imposing their own economic sanctions against the EU and U.S. The EU is Turkey's largest trading partner followed closely by Russia.
The Russia-Ukrainian conflict, therefore, is of utmost importance to Turkish financial markets and how it plays out will move markets.
U.S. Defense Secretary Chuck Hagel will be in Turkey on Monday, shoring up support for the anti-ISIS coalition which has emerged in recent weeks. President Barak Obama met with President Recep Tayyip Erdogan and discussed, at-length, potential solutions to a conflict which has embroiled Iraq and Syria and plunged both countries deeper into sectarian violence then they had experienced in recent years. Turkey's involvement will be critical to stopping ISIS as Turkey is important both geographically but also because of its leadership role in the Middle East.
Equity markets responded positively on news of a coalition coming together, working towards a solution to the ISIS problem as well as positive news of a modest increase in inflation. The benchmark BIST-100 index was up over 1,700 points increasing from 80,503 points last week to over 82,270 points at midday Monday. This brings the BIST-100 within reach of a 52-week high, already up 25 percent for the year. In fixed income markets, both the benchmark two-year government bond and the long-end 10-year issue rallied. As prices of both bonds increased, their inversely proportional yields decreased to 8.71 percent and 8.81 percent respectively. They had traded at 8.90 percent and 9.23 percent, meaning both the two-year and the 10-year saw yields decrease by 29 basis points and 42 basis points respectively.
Foreign investment in financial markets appears to have helped as international investors are moving funds back into Turkey as Europe continues to languish. The Central Registry Agency's (MKK) "Foreign Participation in Turkish Equity Markets" index shows an increase of the foreign-owned share of Turkish equities, up from 64.08 percent to 64.23 percent.
Both the top-line and bottom-line inflation numbers came in modestly above expectations at 9.54 percent and 9.88 percent respectively on an unexpected surge in food prices. Experiencing drought conditions throughout the country and an unexpectedly dry winter, Turkish farmers have been forced to increase prices. Central Bank of the Republic of Turkey's (CBRT) Chairman Erdem Basci had predicted a decrease in food prices by July, which would translate into an overall decrease in inflation, but that call appears to have been made prematurely.
Good news for financial markets, the Turkish Industrial Production Index was up over 3.6 percent year-on-year, it had been forecast to decrease by 10 basis points, from 1.4 percent, but the rate more than doubled by 220 basis points. Insurance against political and economic uncertainty or credit default swaps (CDSs) traded lower for the week as investors viewed Turkey as a safer bet. CDSs had traded at 1.77 percent but went down markedly to 1.68 percent as regional conflicts continued to wane.
The Turkish lira was stable, trading at 2.16 Turkish lira to the U.S. dollar, unchanged in the last week, despite the surprise in the inflation data. This week, markets will turn to the CBRT for GDP and balance of trade numbers; no major surprises are expected. In the following week, Scotland will vote on a referendum which would allow that part of the United Kingdom to separate from the country, winning its own sovereignty through the ballot box. Polls show the voting being too close-tocall and the Pound Sterling appears to be taking a beating as a result. How will this vote affect the financial markets of many other European countries with minorities that have long battled for sovereignty? We'll answer these questions next week.
Keep up to date with what’s happening in Turkey,
it’s region and the world.
You can unsubscribe at any time. By signing up you are agreeing to our Terms of Use and Privacy Policy.
This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.