Turkey’s currency, bond and stock markets endured another hellish day on June 13—the impact of the US Federal Reserve rate hike and the looming threat of trade wars were compounded by persistent nagging worries that a re-elected and ‘reloaded’ President Recep Tayyip Erdogan might want to reverse some of the recent domestic monetary tightening.

As Turkey prepared to enter the Eid religious holidays on June 14 with markets due to close early, the Turkish lira (TRY) stood at 4.6273 to the dollar by 11:15 local time. On June 13, it finished the day on 4.6534 after the Fed lifted its benchmark target rate to the highest level seen since 2008 at 1.75%-2%. The move, made to counter growing US inflation, caused emerging markets to fret that more investors would be lured into giving up on pursuing returns abroad.

With investors worried that Turkey’s large external financing needs make it particularly vulnerable to higher US interest rates, the TRY’s decline on June 13 amounted to around 2% in what was a third straight day of losses, leaving the currency set to weaken around 4% across the week. Last week’s gains in the wake of two hikes from the Turkish central bank, including some emergency tightening, were more than wiped out with the currency around 18% down against the dollar in the year to date.

“The end of easy money entails heightened risks to emerging markets,” Jason Daw at Societe Generale wrote in a note, adding he anticipated more weakness for emerging currencies in the second half of the year.

The markets are also wary of a hawkish move from the European Central Bank (ECB), as well as the June 15 deadline for the Trump White House to detail some $50bn of Chinese goods likely to be subject to a 25% tariff. But turning to the jangling nerves centred on Turkey’s own political trajectory, Timothy Ash, a strategist at BlueBay Asset Management, looked at how investors cannot shake their worries over Erdogan, an unstinting advocate for cheap money to drive growth and job creation who has described interest rates as the "mother and father of all evil". The fear is that once installed back in the Ankara palace as Turkey’s first executive president with sweeping powers—under constitutional changes there will be no prime minister and parliament will have a much weakened role—he might want to reverse some of Turkey's recent rate hikes.

“People are not convinced”
“People are not convinced that if he [Erdogan] wins the elections he will not reverse the 500bps in rate hikes and go back to unorthodoxy and/or deliver on his idea to get more involved in monetary policy, post-election,” Ash said.

“The likeliest scenarios for Turkey post June general elections involve further fiscal deterioration, less institutional independence, and decelerating economic growth—all of which may weigh on the currency,” Daw added in his observations.

The yield of Turkey’s domestic 10-year benchmark sovereign bond hit a new high of 15.92% on June 13. Prices fell for a fourth straight day and some dollar-denominated bonds gave up more than 1 cent. Ankara’s 2038 maturing bond saw the biggest fall with a 1.3 cent drop, while the prices of its 2020, 2021 and 2022 maturing bonds were all close to record lows, Reuters reported.

Bond traders are braced for a deluge of Turkish debt sales next week. Local banks, noted Ash, “were probably lightening up assuming they will be asked to rise to their task of being primary dealers and supporting the market”.

The main BIST-100 Istanbul stock exchange share index fell 1.89% to 93,504 points on June 13 as the bourse continued its recent nosedive from levels above 120,000.

Analysts also noted that the market rout seen in Turkey on June 13 was worsened by a dearth of liquidity before markets closed for the religious holiday.