Turkish Markets Tumble as Diplomatic Row With U.S. Escalates

(Bloomberg) -- Turkey’s markets took a hammering amid a deepening standoff between President Recep Tayyip Erdogan’s government and the U.S.

The lira, stocks and bonds tumbled, while the cost of insuring Turkish credit against a default rose after the two NATO members suspended visa services for each other’s citizens.

The selloff underlined Turkey’s vulnerability as the prospect of U.S. interest-rate increases saps demand for some emerging-market assets, rising oil prices boost the country’s import costs and the government gets increasingly sucked into the conflict in neighboring Syria.

This Lira Sell-Off Isn’t Just a Turkish Issue: Macro View

“This row just adds to all the other concerns people have about Turkey,” Simon Quijano-Evans, a strategist at Legal & General Investment Management Ltd. in London, said by telephone. “It’s not going to trigger an EM-wide contagion, because every market is idiosyncratic. But it does show that political risk is a concern for investors.”

The lira traded 2.8 percent weaker at 3.7190 per dollar as of 4:57 p.m. in Istanbul. The yield on the nation’s 10-year bonds surged 35 basis points to 11.44 percent. The cost of insuring Turkey’s sovereign debt for five years climbed six basis points to 182 basis points.

The Borsa Istanbul 100 Index fell 3 percent after briefly dipping below 100,000 points earlier for the first time since June 21. New York-traded iShares MSCI Turkey ETF, the biggest exchange-traded fund focused on Turkish stocks, fell as much as 6.2 percent at the open of U.S. trading.

Witching Hour

Earlier in Asian trading, the dollar surged as much as 6.6 percent against the lira as markets in Japan, South Korea and Taiwan were closed for holiday. The Turkish currency’s plunge caused live-platform pricing to be turned off and restricted the availability of quotes. As volatility escalated, requests for quotes on “show side only” basis were flashing, according to traders familiar with the transaction who asked not to be identified because they aren’t authorized to speak publicly.

The currency market has faced bouts of extreme volatility during early Asian trading hours, including the pound’s flash crash a year ago as well as the South African rand’s plunge in January 2016. While the lira is a volatile developing-nation currency with thinner trading, Monday’s decline is a reminder of the underlying fragility of the $5.1 trillion-a-day foreign exchange market.

“Almost certainly the liquidity is a significant issue in the price action,” said Andrew Bresler, deputy head of sales trading for Asia Pacific at Saxo Capital Markets Ltd. in Singapore. “This is always the problem with negative news events in early Asia trading timezone. Fewer market participants will exacerbate the move.”

As news broke that the spat between Turkey and the U.S. had intensified, the bid-offer spread in prices offered by interbank market makers blew out to 60 times the average, highlighting the costs of doing business in emerging-market currencies.

In the options market, the premium to buy one-month calls on the dollar against the lira relative to puts surged 69 basis points to 279 basis points, the highest since July.

The U.S. and Turkey said in separate statements that recent events had forced them to “reassess the commitment” of the other to the security of mission facilities and personnel. The moves followed the arrest of a Turkish national who works at the U.S. consulate in Istanbul for alleged involvement in the July 2016 coup attempt against Erdogan.

--With assistance from Dana El Baltaji

To contact the reporters on this story: Tugce Ozsoy in Istanbul at tozsoy1@bloomberg.net, Michael G. Wilson in Sydney at mwilson176@bloomberg.net.

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net, Ven Ram, Anil Varma