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Turkish markets slide as Agbal’s Lira exit creates turmoil

(Bloomberg) – Turkish stocks, bonds and the lira fell as the central bank chief’s shock dismissal sparked concerns that the country was heading for a fresh bout of currency turmoil. In one of the sharpest sell-offs in years, the Borsa Istanbul Index lost more than 9%, triggering circuit breakers that stopped trading. The lira also weakened more than 9%, while Turkish local and dollar bond yields rose. Investors also sold shares in European banks with ties to Turkey. Spanish Banco Bilbao Vizcaya Argentaria SA, which owns about half of the lender Garanti, fell over 7%. The turmoil underscores concern that President Recep Tayyip Erdogan’s ousting of Naci Agbal after just four months as governor marks the end of a period of political orthodoxy and briefly restored the lira’s fortune after a 20% pullback last year. Agbal’s successor, Sahap Kavcioglu, columnist and university professor, has been a critic of recent rate hikes under Agbal’s leadership, including the unexpectedly high hike last week. “The CBRT governor’s replacement is a major blow to investor confidence in Turkey,” wrote Adam Cole, chief currency strategist at RBC Capital Markets. “Unsurprisingly, geographical proximity is the greatest threat to Europe.” BBVA US $ 60 billion Turkish wealth in focus; ING, BNP Exposure Small, the lira’s decline is within a few percentage points of a record low hit on November 6, the day before Agbal was appointed. It traded against the dollar at 7:45 a.m. in New York at 7:45 a.m. after falling to 8.4707 in the early Asian hours, when liquidity tended to be lower for emerging market currencies. The rush to sell the currency when the markets reopened on Monday overwhelmed support for, according to a forex trader familiar with the transactions who has no authority to speak publicly and has asked not to be identified Lira raised by state banks. Erdogan’s decision to fire Agbal, who was trying to restore the central bank’s credibility, has sparked speculation that the country will start cutting interest rates again. Prior to Agbal, investors frequently criticized the Turkish monetary authority for being too quick to reverse a tightening and too slow to react to risk, most recently in August 2018 when the lira lost about a quarter of its value. The layoff has sparked political uncertainty and issues surrounding institutional challenges that threaten financial conditions, ”Moody’s Investors Service analysts, including Madhavi Bokil and Dima Cvetkova, wrote in a note. Several 875 basis point rate hikes since November, including the 200 basis point hike Thursday, had helped Stephen Innes, chief global markets strategist at Axicorp Financial Services Pty Ltd. in Sydney, wrote in a note. “The market has warmed to normalized monetary policy since November. This move is a heavy blow to those hopes. “Finance and Finance Minister Lutfi Elvan said on Monday that Turkey would continue to adhere to free markets and a liberal foreign exchange regime. The government will prioritize price stability and fiscal policy will assist the monetary authority in its efforts to curb inflation. The dollar and the lira will be back below 8, ”said Timothy Ash, strategist at BlueBay Asset Management in London. “I assume that massive government bank interventions will hold the lira in the short term.” Market snapshot The Borsa Istanbul Banks Index, in which foreigners are more strongly represented, fell 9.9%. The yield on the 10-year benchmark Turkish currency the bond rose 483 basis points to 18.89% at close of trade. The benchmark dollar 10-year bond yield rose 138 basis points to 7.344%. Turkey’s five-year credit default swaps rose the most to 455 basis points. Three-month options The volatility of the lira reached 34%. Kavcioglu promised on Sunday to use monetary policy instruments effectively to ensure lasting price stability. He also said the bank’s interest rate meetings will be held on schedule. Kavcioglu is a professor of banking at Marmara University in Istanbul and a columnist for the government-affiliated newspaper Yeni Safak. The paper criticized the monetary authority’s recent rate hike on its front page Friday, saying the decision to turn a deaf ear to Turkey’s 83 million people would hurt economic growth and primarily benefit London-based hot money owners . In a column published by Yeni Safak on February 9, Kavcioglu said it was “sad” to see columnists, bankers and business associations in Turkey looking for economic at a time when other countries had negative interest rates Strive for stability at high interest rates. He also supported Erdogan’s unorthodox theory about the relationship between interest rates and inflation, saying that raising interest rates “would indirectly pave the way for inflation to rise”. Most economists believe the opposite is true. Last LineLear year, Turkish banks spent more than $ 100, according to a report by Goldman Sachs Group Inc. urging Turkish opposition lawmakers to investigate official reserves, foreign investors bought shares worth $ 4.7 billion -Dollars and bonds in the months following Agbal’s appointment. Overseas inflows into Turkey through swaps amounted to around $ 14 billion during that period, said Istanbul-based economist Haluk Burumcekci. What Bloomberg Economics Says: “The blow to the central bank’s credibility and independence cannot be overstated. Erdogan has beaten the institution with interventions that have repeatedly failed. The financial markets were ready to give Agbal a chance. His successor will have a hard time rebuilding that trust. “- Ziad Daoud, Chief Economist for Emerging Markets. For a full REACTION click here. The weakness of the lira could add inflationary pressures in the economy and undermine Turkey’s real interest rate, which is currently the highest in Egypt after the Egyptian one. “Right now, the bigger question is whether we can avoid a liquidity shock / credit event and whether it makes sense to sell in a market that is already at high risk,” said Ed Al-Hussainy, senior interest rate and currency analyst at Columbia Threadneedle Investments in New York. Japanese PositionsWhile Turkey’s high nominal interest rates arose from the appeal for yield hunters, its mercury inflation and the perception that central bank policy was too loose, have made the lira one of the most volatile currencies in the world. Among those who are on the wrong side of the trade are Japanese retail investors. Long positions accounted for nearly 86% of the total lira-yen positions traded on the Tokyo Financial Exchange on Friday. This is the largest value among 14 major currency pairs based on the latest data from Bloomberg. “We’ll never know how successful Agbal’s approach could be, but the first signs have been positive,” said Emre Akcakmak, portfolio advisor at East Capital in Dubai, who expects a reversal of some of the recent hot money inflows If the market stabilizes after a while, investors will have little tolerance, if any, if the new governor cuts rates again prematurely, ”said Akcakmak. (Updates market prices continuously, adds Moody’s comments in the ninth paragraph and Columbia adds Threadneedle comments in the fifth through last paragraph.) For more articles like this, visit us at bloomberg.com. Sign up now to stay up to date with the most trusted business news source. © 2021 Bloomberg LP

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