In the run-up to the presidential election to be held next week, Turkish investors continue to bet on a victory for Recep Tayyip Erdoğan to sustain support for the Justice and Development Party (AK Party) government's economic liberalization policies. Polls show Prime Minister Erdoğan leading by 15 to 20 points in most major surveys. Should he pull off a victory next week, the re-election of the party he founded in next year's general election is also expected. This result would guarantee Turkey another five years of AK Party economics, which markets strongly favor, while the prime minister would take on an apolitical role as president.
An unexpected rise in food prices during the month of July contributed to a slight rise in inflation. Annual inflation rose 16 basis points from 9.16 percent in June to 9.32 percent for the month of July. An unexpectedly dry winter and spring has led to widespread drought in the nation's agricultural areas, contributing to lower crop yields and higher food prices.
The Central Bank of the Republic of Turkey (TCMB) continues to believe that the drop in inflation that began last month will continue in the coming months despite the slight increase in July. Should the TCMB's predictions become reality, bond prices should continue to increase as yields decrease and the Turkish lira should strengthen against hard currencies such as the U.S. dollar.
In the interim, financial markets saw profittaking materialize on worries of inflation in bond markets as both the benchmark two-year and long-end 10-year bonds sold off. The benchmark issue was down as its yield jumped from 8.03 percent to 8.88 percent in trading following the TCMB's announcement. The 10-year's yield traded at 9.19 percent, up over half a percent from its level of 8.64 percent that it had traded last week.
The Turkish lira also fell on the inflation news, falling to 2.13 Turkish liras to the U.S. dollar - down 0.03 lira in the last week. The government's 2.05 to 2.15 implied currency band should continue to hold as currency markets appear to have overreacted to inflation worries and recouped some earlier losses.
Credit-default swaps or insurance against economic and political instability were also up slightly, trading at 1.84 percent, as CDSs around the region increased in tandem. Eurozone member Portugal, in the midst of an economic meltdown, also saw an increase in its CDSs of 30 basis points despite an implied ECB guarantee on its debt. Turkey's CDSs were up by 10 basis points during the same period.
Equity markets also sold off after a blistering spike in stocks across the board at the BIST exchange. The benchmark BIST-100 index is up over 24 percent for the year, while losing two percent in the last week on the inflation numbers. The index sits at 82,476, down 1,700 points from the 84,218 level it held last week. Generally, Turkish markets realize a peak 10 days before a landslide electoral victory is predicted and sell off before the election and briefly afterwards as investors that had "bought the rumor" begin to "sell the news."
A second oil-tanker carrying crude from the Turkish port of Ceyhan is heading toward the U.S. following a U.S. court order to seize $100 million (TL 213.32) worth of crude from the Kurdistan Regional Government (KRG). The court order followed a lawsuit brought by the central government in Baghdad that asserts it has the sole authority to export oil from Iraqi lands. In the meantime, the KRG's peshmerga military forces continue to fight Islamic State of Iraq and al-Sham (ISIS) on behalf of the Iraqi central government, which appears to be struggling in holding ISIS forces at bay.
This leaves the U.S. State Department in a bind as it would like to support the KRG in fighting ISIS via providing arms, however it also wants to aid the central government in Baghdad, while simultaneously seeking to replace the current "ineffective" Prime Minister Nuri al-Maliki.
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