Turkish Assets Are Back to Square One Before Erdogan's Next Move

(Bloomberg) -- Well, that rally didn’t last long.

It took less than one trading day for the Turkish currency to erase gains fueled by President Recep Tayyip Erdogan’s election victory on Sunday. Bonds reversed an advance to send yields to a record high on Tuesday.

Turkish Assets Are Back to Square One Before Erdogan's Next Move

Investors are uncertain about how Erdogan will deal with the country’s economic problems and what kind of control he’ll wield over monetary policy. He will need to work hard to win them over and traders are likely to continue to test him and the central bank until he does.

“Turkey can be a very interesting opportunity for investors” but the market will “severely constrain” how Erdogan uses his powers, Shamaila Khan, a director of emerging-market debt at AllianceBernstein LP, said on Bloomberg TV. There’s a risk Turkish assets could be “severely punished” if Erdogan pursues similar policies to the past few months.

After jacking up the economy in the run-up to the vote, Turkey remains far too reliant on capital inflows and inflation is holding in double digits. Investors are worried that Erdogan may not be serious about putting the economy on a more sustainable footing given what they see as a single-minded focus on growth.

The first signs of policy direction will come when Erdogan puts together his cabinet in coming days. The lira slipped 0.4 percent to 4.7021 against the dollar on Tuesday, holding below Friday’s closing price of 4.6771. The yield on the nation’s 10-year bonds climbed 50 basis points to a record 17.42 percent.

“The market is eager to see the economy management and the economy policies,” said Erkin Isik, a strategist at Turk Ekonomi Bankasi AS. “However, it seems that we will have to wait for about two weeks before the official announcement.”

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