Turkish Assets Rally After Trump Seen Softening Sanctions Threat

(Bloomberg) -- The lira and Turkish stocks advanced after U.S. President Donald Trump’s indicated he may reassess his threats to sanction Turkey over its purchase of a Russian missile defense system, fueling speculation that any penalty imposed will be benign.

The currency climbed more than 2% against the dollar, pushing the dollar-lira pair below its 100-day moving average. It’s now testing its 50-week moving average, a level it hasn’t closed below since September 2017. The country’s banking stocks helped push the benchmark Borsa Istanbul 100 Index up as much as 3.2%, and credit default swaps declined to the lowest level since March on a closing basis.

“The sanctions will go into effect latest by August, but they will be mild,” GlobalSource Partners analysts including Atilla Yesilada wrote in a note to clients.

Anxiety among investors over the S-400 delivery, which may come as soon as next month, has contributed to the weak performance of Turkish assets this year. In June, people familiar with the matter said the Trump administration was weighing three sanction packages, one of which would all but cripple the already troubled Turkish economy.

Alleviating the threat of sanctions may help ease bearish bets on the currency, especially given the allure of Turkey’s 5.3% real yields. It also helps that investors worldwide are relieved the U.S. and China called time on their trade war, buying up risky assets while the truce lasts.

The lira added 2.3%, the most in emerging markets, to 5.6610 per dollar as of 2:20 p.m. in Istanbul. The main stock gauge’s advance was strong enough for its 14-day relative strength index to signal that it may risen too far, too fast. The benchmark has climbed about 19% since hitting a 2017-low in May. And five-year credit default swaps fell a sixth day to 376 basis points, the lowest level since March 21.

Although the meeting Trump and Erdogan created “some optimism” about the potential fallout of the S-400 deal, “it remains unclear how the sides will agree on avoiding sanctions despite pressures from the U.S. Congress,” Global Securities’ analysts including Sertan Kargin and Evren Gezer wrote in their morning note.

To contact the reporters on this story: Dana El Baltaji in Dubai at delbaltaji@bloomberg.net;Tugce Ozsoy in Istanbul at tozsoy1@bloomberg.net

To contact the editors responsible for this story: Justin Carrigan at jcarrigan@bloomberg.net, Constantine Courcoulas, Srinivasan Sivabalan

©2019 Bloomberg L.P.