Turkish stocks fell 5% and bond yields rose yesterday 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% and Turkish Airlines falling almost 8%.
Investors demanding a higher risk premium pushed yields higher and prices lower in local and dollar-denominated bonds, while the cost of insuring exposure to Turkish debt also jumped.”
A bit of political risk premium has to be repriced in the FX and bond market, this has already happened to some extent,” said Murat Toprak, EM 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. The lira strengthened against the dollar by 2% though those gains failed to offset the more than 4% fall the currency suffered on Friday night.
But analysts predict little contagion to other emerging markets which are likely to continue benefiting from the backdrop of rock-bottom or even sub-zero bond yields in the developed world. “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% 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 % to its highest in more than 3 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.