Turkish Markets Rally as Early Vote Reduces Policy Uncertainty

(Bloomberg) -- Turkey’s lira rallied, bonds gained and stocks reversed earlier declines after President Recep Tayyip Erdogan called snap elections, putting an end to a key source of uncertainty weighing on investor sentiment.

The Turkish economy has been showing signs of overheating and speculation has been mounting that the ruling Justice and Development Party would need to either double down and deliver more stimulus, or bring forward a vote originally scheduled for November 2019.

Erdogan’s decision to bring forward the vote to June 24 removes a lot of uncertainty over the course of future policy, while adding to speculation that political pressure on the central bank to keep interest rates low and support growth will abate. The lira has been buckling under the weight of a ballooning current-account deficit and double-digit inflation, and touched its weakest level on record against the dollar last week. Central bank policy makers are scheduled to meet next on April 25.

“We feel new elections will prompt the government to prioritize foreign-exchange stability ahead of the vote and permit the Turkish central bank to do what is necessary to prevent lira volatility,” said Paul Greer, a London-based money manager at Fidelity Investment Management Ltd. “A CBRT policy rate hike of perhaps more than 50 basis points could come as soon as the next MPC meeting.”

Lira Surges

Turkey’s lira gained as much as 1.9 percent to 4.0188 against the dollar, its strongest level in two weeks. The pair reached a record 4.1934 on April 11. The yield on 10-year government bonds slid 38 basis points to 12.69 percent, while the benchmark Borsa Istanbul 100-Index reversed an earlier decline to climb almost 3 percent, led by banks.

“The market is loving it,” said Timothy Ash, a strategist at BlueBay Asset Management in London. “The hope is that with a new government in place by late June they can better address some of the big challenges facing Turkey.”

The June election date announced by Erdogan is “much sooner” than that suggested by Devlet Bahceli on Wednesday, said Inan Demir, an economist at Nomura International Plc. Bahceli is the leader of the nationalist party allied with Erdogan’s government and surprised markets by calling this week for an August vote.

The market’s “interpretation leaves much less room for populist spending ahead of the election and adding to the urgency for the central bank to stabilize the currency,” Demir said.

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