A critical week for Turkish financial markets began positively Monday, as much news awaits traders and individual investors in the coming days. The global impact of the U.S. Federal Reserve's policy of tapering or winding down of Fed purchases of U.S. asset backed securities, continues to hurt emerging markets and the recent turmoil in the Ukraine, Thailand, and Venezuela has left an air of uncertainty around the globe. All three countries have seen massive protests against government forces as all three weather major economic upheaval. Despite a chance at relative calm on the horizon for the Ukraine, all three nations face major hurdles to stability.
Newly appointed Federal Reserve Chairwoman Janet Yellen has indicated that further improvement in U.S. unemployment numbers could signal increased interest rates. Such a move or even an indication of such a future move will undoubtedly put pressure on the fixed income issuances of emerging markets. This is of the utmost importance to Turkey this week as the Turkish Treasury began issuing mid-term bonds yesterday and will continue to issue bonds at every spectrum of the yield curve, from debt expiring in 2 to 10 years, both fixed and floating rate bonds, the remainder of which are scheduled for this afternoon.
The performance of bond issuances yesterday showed real strength and stability in the Turkish bond market as both issuances were highly oversubscribed. The 2018 and 2020 bonds had bid to cover ratios of 5.0 and 3.5 respectively, meaning that for every bond that was auctioned off, there were several multiples of buyers. Today's auctions will continue to be an important signal as to the perceived strength of the Turkish economy and the expectations of the investor community as to the results of the upcoming municipal elections.
This week will also bring important economic numbers, as data covering real sector confidence and capacity utilization were released Monday and are followed by consumer confidence on Thursday and finally trade balance numbers on Friday. Monday's numbers showed a jump in real sector confidence and stability in capacity utilization, both good signs for stability in the economy. Although there has been considerable stabilization in foreign exchange rates versus the Turkish Lira recently, the decrease in its value should help the trade balance numbers covering January to be released on Friday.
Yesterday's economic data and successful bond auctions helped the broader bond market and equity markets and added strength and stability to the Turkish Lira. The improvement in the exchange rate and the stabilization of the Borsa Istanbul 100 index indicates the belief in the markets that the Turkish Government is handily winning the "power struggle" it is having with various seemingly united factions.
The current "power struggle" is viewed by the government as an extension of the "Gezi Park" crisis which began last summer, immediately after Fed Chairman Bernanke announced tapering in Fed buying, hurting emerging markets across the board, including Turkey. What began with the Fed chairman's announcement was immediately followed by serendipitous opposition to plans for construction near Taksim- announced six months earlier - which subsequently sparked the "Gezi Park" crisis. After the government was able to reaffirm the support it had from the Turkish public with several massive pro-government rallies, there were several months of relative calm. The calm was disturbed by the resignation of a Turkish parliamentarian, previously aligned with the government hours before a wave of indictments were announced, targeting members of those close to the AK Party led government.
Recent market reaction indicates the belief that the AK Party should be successful in the upcoming municipal elections at the end of March. This is supported by public opinion polls, which show that currently the AK Party appears to be in good shape in major Turkish cities including the financial and official capitals, Istanbul and Ankara.
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