Turkish Market Disappointment

23 May, 11:56 PM
Recep Tayyip Erdoğan (Photo:Presidential Press Office/Handout via REUTERS)

Recep Tayyip Erdoğan (Photo:Presidential Press Office/Handout via REUTERS)

On the eve of the Turkish presidential elections, investors and speculators bet on the victory of the opposition candidate. Instead, the markets were disappointed by the results of the vote. 

Some tried to learn the last name of the opposition leader. Others simply called him "KK" and bought Turkish assets, linking the opposition's victory with a return to normal macroeconomic policies that promised light at the end of the Turkish inflation tunnel. Everyone understood that it would hurt, but expectations were that quick surgical intervention could still save the patient by sharply changing the course of the lira, returning independence to the Turkish Central Bank, and thus causing an active inflow of capital into the country. Instead, Erdogan held course on the lira with his last strength, which would have lasted only until the elections. And populist promises during the elections, including a sharp salary increase, could not but affect 2023.

Video of day

Election day changed everything.

In the morning, bookmakers preferred the opposition, even ignoring the initial data from the polling stations and bringing the coefficient for the victory of KK in bookmakers' offices to an indecent 1.35. It was as if Dynamo was playing against a second-league team.

Data was received by counting the villages first, where Erdogan's base lives. Like many conservative, strong leaders, ultra-populists who rely on traditional values draw their electoral strengths from uneducated and poor people. By evening, bookmakers' coefficients have radically turned around. Let there be a second round, but now the market almost does not doubt Erdogan's victory and the continuation of his crazy economic policies. The odds of Erdogan winning in the final of the Turkish elections are approximately equal to that of Manchester City in the final of the Champions League. Terrified investors fled from Turkish assets, accelerating the outflow of capital and putting even more pressure on the reserves of the Turkish Central Bank, which are already in an indecent position and have long been hinting to investors that Turkey can always be the first domino that brings down many other developing economies. The fall of the Turkish lira also accelerated. However, this process is so familiar in Erdogan's era that it is unlikely to cause panic, at least not in Turkey itself.

On a global level, there is unprecedented optimism. As a result, the S&P500 index opened on Friday at 4198 points, the highest since August 2022. Investors and speculators are focused on negotiations on the ceiling of US public debt. The tense news is coming not only from Biden, who canceled a historic visit to Papua New Guinea for these negotiations, but also from Republicans. Nevertheless, they will likely reach an agreement by this year's deadline, though American officials will not have long summer weekends. This positive news, among other things, is strengthening the dollar, which has gained a few percentage points against the euro. The key global currency pairing, the dollar-euro, traded near 1.078 dollars per euro on Friday morning. The strengthening of the dollar has been aided by a decrease in the overall fear of recession among players in the market against the backdrop of more positive macro data from the US.

The extension of the grain agreement became a crucial event in the Ukrainian economy. The Russians again agreed to extend the grain agreement without additional conditions and without receiving positive responses to their newer requests. Sometimes, it seems that they feel masochistic pleasure every time they have to agree with the Turks and retract their demands. Of course, they will continue to sabotage the departure of ships, making Ukrainian farmers nervous. Still, exports will continue, supporting the rate of the hryvnia, which can, in any case, support anyone, especially the Turkish lira. The cash rate of the hryvnia strengthened by 30 kopecks this week and stood at around 37.4 hryvnias per dollar on Friday morning.

On the Eurobond market, investors had optimism. It may be the movement of general optimism against the background of which part of the market has turned its attention to the cheapness of the Ukrainian external debt in search of exciting opportunities. Or it could be more optimistic expectations for the Ukrainian offensive, which markets eagerly await. As a result, Ukrainian government Eurobond prices added an average of 1.5 points, and warrants rose 2 points. The domestic bond market, paradoxically, is less sensitive to the triumph of the Patriot missile system, regarding expectations of movements on the front. There it is calm and peaceful.

P.S. Success is ... knowing your purpose in life, growing to reach your maximum potential, and sowing seeds that benefit others.

John C. Maxwell

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