Turkish financial markets continue to be white-hot as foreign investors move more money into Turkish equities and debt instruments. Thursday's announcement by European Central Bank (ECB) Chairman Mario Draghi, although not a total surprise, was unexpectedly bearish on Europe's chances of getting out of its current economic malaise without ECB support. The news of unprecedented steps by the ECB acted as a catalyst in European markets, pushing investors with access to virtually 'free-money' to invest in European bluechips and 'sovereign debt,' while simultaneously moving some investors out of Eurozone markets and into markets with more promising fundamentals such as Turkey.
The ECB's announcement of negative interest rates for funds parked at the ECB was meant to trigger banks of the 18 Eurozone countries to move money into the hands of businesses and households who desperately need liquidity in this time of recession.
Whether this measure will have the intended consequences is yet to be seen. The obvious impetus for such a move comes from the Federal Reserve Bank of the U.S., or Fed, and its zero percent interest rate coupled with its bond-buying, or quantitative easing, scheme. Europe's problems are far greater than those of the U.S. and thus similar tactics in increasing liquidity will have far different results.
Although the FED technically has no fiscal policy power, the U.S. government can better coordinate itself with FED actions as both act in the best interests of the U.S. alone, whereas the ECB has 18 different nations and their fiscal policy to worry about. Therefore, I doubt the ECB will find its actions to be as effective as those of the FED's because of the varying characteristics of both "central banks."
Apparently, many European investors agreed with me as The Central Registry Agency's (MKK) "Foreign Participation in Turkish Equity Markets index" hit 64.13 percent Friday, up 0.14 percent from last week, reaching another high and its highest value since last year's Gezi protests.
With the inflow of new capital, the benchmark BIST-100 index traded at 80,933 near the close of trading Monday, up over one percent from its level of 79,800 a week ago.Fixed income markets also participated in this resilient bull market with both the benchmark two-year and ten-year bonds trading up considerably from last week's closes. As bond prices increase their yields decrease, bringing the two-year bond's yield down from 8.36% to 8.13% while the tenyear also gained ground, sending its yield ever lower from 8.98% to 8.59%.
Credit-default swaps, or CDSs, continued to trade lower as well. A good instrument of insuring against political and economic uncertainty, investors dumped Turkish CDSs as they traded at 1.62%, down from 1.79% where they stood last week. The lack of a nomination by opposition parties to face-off against current Prime Minister Recep Tayyip Erdogan in his bid in the upcoming Presidential election was greeted warmly by investors who applaud the continuity and liberalization of financial markets by the governing AK Party by dumping this insurance.
The Turkish lira also gained strength against the U.S. dollar and the Euro trading at 2.08 Turkish liras to the dollar, down from its 2.10 level, where it traded last Monday.Good economic news in the form of lower than expected inflation numbers released on Tuesday also helped push markets higher with the producer price index actually coming in negatively, meaning producer's costs are decreasing, a decrease which they are predicted to pass on to customers, by the Central Bank of Turkey, in the coming weeks. On Monday, good news continued to flow to financial markets as industrial production numbers were up by 4.6% year-over-year, significantly higher than the expected increase of 3.8% by economists.
With no other major financial data being released this week, markets are poised to continue to gain ground before entering a resting pattern in anticipation of the nomination of opposition candidates for the presidency. I predict the TL will continue to trade in its narrower pattern, while equities and bonds will also take a short breather before moving higher throughout the summer.