(Bloomberg) — Turkey halted trades on the Istanbul bourse as this year’s second biggest selloff for the market triggered circuit breakers while the lira extended its drop to a fresh record low.
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Trading of equities, equity derivatives and debt repo transactions were automatically halted twice within an hour after the Borsa Istanbul 100 index fell as much as 7% on Friday.
The benchmark ended the day 8.5% lower, its biggest drop since March when the firing of then-central bank Governor Naci Agbal spurred a turmoil in Turkish financial markets.
Turkish equities were on a tear for much of the last four months as investors sought to hedge against rampant inflation and grapple with a currency that lost more than half its value against the greenback so far this year. Friday’s dramatic drops followed a central bank intervention in the currency market that failed to stem the lira’s decline following a decision by the monetary authority a day earlier to cut benchmark repo rate despite soaring inflation.
Even though the Borsa Istanbul index has strongly rallied this year in local terms, in U.S. dollar terms it’s down 36%, making it the worst-performing equity market in the world.
“The complete capitulation in Turkish equities today may represent a turning point in local sentiment,” Nick Stadtmiller, director for emerging markets at Medley Advisors, said by email. “Turkish stocks have surged despite a worsening macro backdrop. But now, Turks pulling their money from the stock market may represent an acceleration in the trend of local capital outflows from the country.”
Easing Cycle
The Turkish central bank’s easing cycle since September saw the key rate fall by 5 percentage points, prompting a rush to buy dollars among corporates and retail investors. Worsening outlook for inflation hit bonds, with 10-year yields reaching 22.8% on Friday, a record, according to data going back to 2010.
President Recep Tayyip Erdogan has advocated for cuts in borrowing costs, arguing that lower rates will eventually free Turkey’s economy from a reliance on short-term foreign inflows. The policy pivot and the ensuing market turmoil prompted complaints from industrialists, who say the current volatility is hurting companies.
Turkish Business Groups Sound Alarm Bells Over Currency Rout
That call for help is probably one of the reasons that caused the selloff in stocks, according to Burak Cetinceker, a money manager at Strateji Portfoy in Istanbul. “The critism from business people showed there is no synergy” with the central bank, he said. “There is an economy model no one understands.”
“The typical reaction to depreciation in emerging-market stock markets is a rally as investors use equities as a hedge and the leading shares often have a lot of hard currency revenues,” Richard Segal, a research analyst at London-based Ambrosia Capital, said. “However, today is different due to the volatility of the exchange rate, and the lira is approaching rates, which suggest bank capital ratios are running low. In addition, some business groups have begun to speak out more publicly.”
(Updates with markets close, comments from second paragraph.)
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