Turkish financial markets moved higher last week, following the swearing-in of President Erdoğan and the subsequent naming of Prime Minister Davutoğlu's cabinet. Davutoğlu reappointed many of his predecessor's ministers as well as a few market-friendly additions.
Former Vice-Premier Besir Atalay was replaced by Numan Kurtulmus, the economy chief of the AK Party. Kurtulmus, an economics professor at Istanbul University is widely admired as both an academic and a seasoned political figure. Markets appear to have reacted positively to Prof. Kurtulmus, who completed his dissertation while conducting research at Cornell University. Any appointment to the cabinet of a pro-liberalization deputy premier with global exposure is generally viewed positively by Turkish financial markets dominated by foreign investors.
Kurtulmus wasn't the only good news coming out of Ankara this week, as consumer confidence data were up, while trade deficit numbers were down. The consumer confidence index was slated to decrease sharply amidst regional tensions, with consensus estimates predicting a level of 72.3, however, the index came in at 73.2 points, indicating greater confidence by surveyed consumers. Additionally, the trade deficit shrank by 1.4 billion Turkish liras, over a billion liras more than consensus estimates. This, despite a slowdown in export markets in Europe and the Middle East, the former experiencing continued economic malaise and the latter embroiled in an all-out war with ISIS fighters terrorizing Iraq and Syria. The trade deficit is perhaps the largest hurdle Turkey will have to overcome for it to meet its 2023 goals of becoming a G10 country.
The BIST-100 rallied on news of Davutoğlu's cabinet, bringing the benchmark index up over 1,000 points to 80,503 points midday Monday. The index had been down to 76,600 points ahead of the election as profit-takers predicted President Erdogan's victory a foregone conclusion and appears to be retracing the highs of the 84,000 mark bouncing back off of the now wellestablished 76,000 floor.
Fixed-income markets also rallied this past week with the benchmark two-year government issue rising in price as its yield fell to 8.90 percent, down 13 basis points in the last week. The long-end 10-year bond also rallied with its inversely proportional yield falling over 31 basis points to 9.23 percent.
Markets also responded positively to the Turkish central bank's Monetary Policy Committee's decision to keep the overnight borrowing rate unchanged while lowering the top-end by 75 basis points, bringing the overnight lending rate to 11.25 percent. The weekly repo rate stands at 8.25 percent while the overnight borrowing rate sits at 7.5 percent.
Insurance against economic and political uncertainty in Turkey, measured by the trade of credit-default swaps (CDS), also traded lower as all political uncertainties appear to have been put to rest following the naming of the cabinet which will take Turkey into the Parliamentary elections slated for early 2015. At midday Monday, CDSs traded at 1.77% down six basis points from 1.83% in the last week. I expect CDS rates to continue to come down in the coming months ahead of these elections.
The Central Registry Agency's (MKK) "Foreign Participation in Turkish Equity Markets" index was also up on the cabinet news, up to 64.08 percent as foreign investors piled into Turkish equities. The index had not been this high since foreign investors took profits right before the election and exited several days before the election itself. The Turkish lira also rallied in the last week with one U.S. dollar buying 2.16 Turkish liras, down from 2.18 liras. The lira has strengthened on both news of continuity within the cabinet as well as increased foreign involvement in isolating ISIS fighters in Iraq and Syria. The Kurdistan Regional Government had been asking for foreign intervention in the last few weeks as ISIS moved closer to the capital, Irbil. The KRG appears to have held off ISIS in the near-term with support from U.S. airstrikes as well as arms from Canada and Australia.
The KRG also claimed a victory in U.S. courts last week as their shipment of crude oil has been sitting right outside of U.S. territorial waters off of Galveston, Texas while the courts decided the fate of the precious cargo. At issue is whether or not the KRG has the right to ship oil from Kurdistan through Turkey and sell it in the global marketplace, unilaterally. Earlier courts had ordered the oil to be seized as the central government in Baghdad claimed they were responsible for all mineral and hydrocarbon rights and that the KRG could not ship without their authorization. A U.S. federal court ruled last week that the crude could be offloaded lifting a lower courts' order to seize the cargo.
As ISIS appears to be headed for a slow demise resulting from the joint efforts of the United States, Iran, and other members of an anti-ISIS coalition, Turkish financial markets should move higher. A resolution to the Syrian civilwar is also long-overdue and would benefit the entire Middle East as rebuilding in that nation begins. Look for markets to edge up cautiously by the end of the year in anticipation of a resolution to the ISIS conflict, the Syrian civil-war, and potential (but far-off in my estimation) rate increases by the Federal Reserve. Inflation numbers are to be released Wednesday and manufacturing data will be released on Thursday. Look for both numbers to come in flat.