Turkey Stocks Dive for a Second Day in Steepest Rout in 20 Years

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(Bloomberg) —

Turkish stocks headed for their worst two-day plunge in 20 years as market gyrations continued in the wake of the central bank chief’s surprise dismissal over the weekend.

Stocks took the brunt of the selling on Tuesday and the Istanbul bourse was once again forced to halt trading as circuit breakers were flipped, first by a loss of 5%, then 7%. Later in the morning, equities pared some losses and the lira stabilized near a record low.

Amid all the selling, Turkish equities and the lira have gone from being among the best bets in emerging markets to the worst performers after President Recep Tayyip Erdogan’s decision to fire his hawkish central bank Governor Naci Agbal after just three months on the job. That’s spurred concerns Agbal’s orthodox policies will be rolled back, sending the lira to its worst drop since the nation’s currency crisis of 2018.

“We’re going through days where it’s hard to be a long-term investor,” said Haydar Acun, managing partner of Istanbul-based Marmara Capital. “The panic selling is likely to continue for a few days.”

Turkish policy makers sought to calm markets on Tuesday. Yigit Bulut, a senior adviser to Erdogan, said the Turkish central bank would avoid any extraordinary steps under Agbal’s successor, Sahap Kavcioglu. At the same time, he reiterated Erdogan’s monetary policy theory that high inflation is caused by elevated interest rates.

Central Bank of Erdogan Has Foreign Cash Exiting Turkey

Foreign investors have a big presence in Turkey’s banking industry and the nation’s lenders led the equity declines. Erdemir and Garanti fell 4% and 9.9%, respectively, helping push the Borsa Istanbul Banks Index down more than 9%.

Last year, Turkish stocks were among the top three primary equity indexes tracked by Bloomberg, when measured in local currency. After the slump this week, they’re at the bottom in the same group.

It was a similar picture for the lira after Agbal’s appointment in November. At the start of March, the currency was the strongest in emerging markets. Now Renaissance Capital predict it could slide a further 14% by year-end.

The lira clawed back some of its losses on Tuesday, adding 0.4% to 7.7727 per dollar as of 10:58 a.m. in Istanbul, after plunging as much as 15% on Monday. But options traders are the most bearish on the currency since September 2018, one-month risk reversals show.

The yield on Turkey’s benchmark 10-year local-currency bond climbed 41 basis points to 19.3%, the highest since May 2019, following Monday’s record jump of 483 basis points.

“Barring the carry, which is suppressing short-term weakness in the lira, the overall decimation of central-bank credibility and independence will see further outflows out of Turkey,” said Saed Abukarsh, chief investment officer at Ark Capital Management in Dubai. “Ultimately, Erdogan would like to make an omelet without breaking any eggs.”

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