Early Turkish elections could upset investor optimism

Subject

The marked improvement in sentiment towards Turkish assets since mid-January.

Significance

Despite the uncertain outcome of Turkey’s crucial constitutional referendum on April 16, the lira has risen against the dollar while foreign investors have resumed their purchases of domestic Turkish debt, after months of heavy outflows from the local bond market. The sharp improvement in sentiment towards emerging markets (EMs) this year and the tightening in liquidity by the Central Bank (TCMB) are easing the strain on the country’s financial markets, despite significant domestic and external risks.

Impacts

• Fears of a sharp sell-off in global bond markets following Donald Trump's victory in the US presidential election have not materialised.
• This is partly because aggressive monetary stimulus in Europe and Japan is continuing to suppress yields.
• Recent rising oil prices are sustaining the commodity price recovery that has underpinned improved sentiment towards EMs since 2016.
• EM currencies’ strong performance is partly due to gradual improvement in economic fundamentals in many developing economies.