Turkish financial markets ended 2014 at the top of best performing European bourses. The benchmark BIST-100 equity index returned nearly 30 percent to investors that bet on Turkey last year. Turkey was also at the top of a list of all investment grade countries, returning positive returns this year. European markets were generally mixed with mostly single digit returns despite indications of quantitative easing and assurances from the ECB to prop-up troubled European securities. The yearlong equity rally in Turkey followed a year of political uncertainty - uncertainty that was mostly put to rest with the reelection of the ruling party and the completion of the first popular election for President of the Republic.
Turkish financial markets fared well despite a perfect storm brewing on Turkey's borders. Armed-conflict, coups, political upheaval and economic uncertainty dominated the landscape of Turkey's neighboring countries. A near economic collapse in Russia and Iraq, Turkey's top two trading partners, caused total exports to decrease while simultaneously increasing the balance of the trade deficit. The $8.32 billion deficit in the month of November was much higher than previously estimated and indicates the return to normalcy will take much longer than had been thought as exports to both nations fell by double digits.
The BIST-100 reacted to the widening trade deficit and a better than expected inflation report released Monday by starting off the first full week up over 1 percent, trading at 86,489 points late Monday. Turkish bottom line inflation numbers fell to 8.17 percent down 98 basis points from 9.15 percent. This was a major drop in inflation and was long awaited by investors.
Fixed income markets also rallied on Monday with both the benchmark two-year and long-end 10-year trading higher as their yields fell 47 basis points and 33 basis points from their high before the release of the inflation data. Both government issues traded at their highest level in three weeks as investors bet that falling crude prices were finally beginning to translate into lower prices for consumer goods and thus lower inflation.
Crude oil continued to fall with Brent sea crude falling to below $55 on Monday for the first time in over six years. A continued collapse of the crude oil market has adversely affected the ability of Russia and other Turkish trading partner nations to finance purchases of Turkish goods. Although energy-dependent Turkey benefits from cheaper oil in the short-term, lowering its input costs of production, a fatal blow to trading partners would hurt Turkey's economy in the long-term. At what price would crude oil prices allow trading partners to continue to purchase Turkish goods while also allowing Turkey to benefit from lowered costs of production? This is the question currently on most investors' minds, looking to time the Turkish market.
The Turkish lira also improved Monday from its highs of the session. The lira traded better than 100 basis points against the U.S. dollar in later afternoon trading making up for earlier losses in the day. One U.S. dollar bought 2.3403 Turkish liras late Monday.
Insurance against economic and political uncertainty in the form of Credit-Default Swaps (CDSs) were more expensive to insure Turkey Monday, as CDSs in general moved higher throughout European financial markets. Currently, Turkish five-year corporate debt insurance trades at 1.88 percent, slightly less expensive than insuring eurozone member Portugal.
The Central Registry Agency's (MKK) foreign participation in the Turkish equity markets index closed out the year higher at 63.81 percent, up 20 basis points for the final week of the year, as foreign investors remained heavily invested in Turkish securities.
Should inflation continue to trend down as today's data release indicates, the lira should gain strength and with it interest in Turkish fixed income markets. Turkish financial institutions, heavily invested in fixed income instruments, will benefit the most from increasing bond prices and their share prices should also increase as their balance sheets improve.
Today's data is a great start to a year in which dropping crude oil prices will be the central story to watch.
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