Cablegate: Sell-Off in Turkish Markets

Published: Tue 27 Apr 2004 04:50 PM
This record is a partial extract of the original cable. The full text of the original cable is not available.
271650Z Apr 04
E.O. 12958: N/A
1. (Sbu)Last week's Turkish market correction picked up steam
this week with a strong sell-off in equity and currency
markets and an uptick in Government securities' interest
rates. Despite the Central Bank halting its foreign exchange
purchase auctions, the TL hit 1.43 million to the USD Tuesday
morning, the lowest level in 2004, before easing back to
1.420 at the close. Equity markets fell 1.99 percent Tuesday
after falling 4.5 percent Monday. The interest rate on the
benchmark Treasury bond increased 48 basis points Tuesday to
24.38 percent. Post contacts attribute the sell-off to a
combination of foreign selling, increased expectations of a
U.S. interest rate hike, market disappointment that the EU
did not give stronger recognition to Turkey's efforts on
Cyprus, and a herd-like behavior. End Summary.
Monday-Tuesday Sell-off:
2. (U) Last week's volatility and nervousness in Turkish
financial markets continued into this week, with an
accelerating sell-off that only stabilized Tuesday afternoon.
On Monday, the equity markets were hardest hit with a fall
of 4.35 percent in the IMKB 100 from last week's close to
18,586.45. On Tuesday morning the selling continued through
the psychological 18,000 barrier in the morning, before
coming back up to 18,217.13 at the close--a 1.99 percent fall
for the day.
3. (Sbu) Foreign exchange markets have been more or less on a
falling trend for the past couple of weeks since the Central
Bank was widely considered to have spooked markets by
overdoing its FX buying auctions in mid-April. With last
week's lira weakness, many analysts were expecting the
Central Bank to cut back its auctions--and possibly cut
interest rates--once the Cyprus referendum was over. The
lira depreciation accelerated in late afternoon trading
Monday (the lira closed at 1.391 million to the USD
yesterday, down from 1.382 on the day), and depreciated
sharply early Tuesday, breaking through the TL 1.4 million
barrier. The Central Bank promptly announced it would cease
its FX buying auctions until May 3. Interestingly, the
announcement caused the lira to appreciate back below TL 1.4
million but then quickly resumed its fall, getting over TL
1.43, its lowest level in 2004, before coming back to TL
1.4205 at the close.
4. (U) Interest rates on government securities, which had
been inching up since they hit early April lows of below 22
percent on the benchmark bond, had a notable uptick on
Tuesday, rising 48 basis points to 23.46 percent on the
benchmark. Despite the upward movement in interest rates,
the Treasury's ability to tap the markets and roll over its
debt remains undamaged: the Treasury successfully sold about
2.8 Quadrillion TL ($2.0 billion) of t-bills and bonds on
Tuesday, of which TL 2.0 Quadrillion were 535 day bonds that
will help Treasury in its key goal of increasing the average
maturity of its TL-denominated debt.
Motivating Factors:
5. (Sbu) Post contacts did not see a single driving factor in
the sell-off, instead attributing it to a combination of
factors. The increased expectation of a Fed hike in U.S.
interest rates that played a key role in last week's
correction continued to be a factor. Baturalp Candemir of HC
Istanbul said that several U.S.-based funds told him that a
combination of inreased U.S. rate hike expectations and a
desire to lower their Turkey exposure caused them to pull
funds out of Turkish assets, especially fixed income
instruments. Candemir said that even though equities appear
to have been hardest hit, the equity market is
hyper-sensitive to small amounts of foreign selling whereas
it takes much larger amounts to have a dramatic impact on
fixed income markets. He said that ever since the Central
Bank overdid its FX buying two weeks ago, foreigners pulled
back from the game they had been playing, i.e. betting on a
continued strong lira and steadily falling Turkish interest
rates. Candemir estimates that of the roughly $5.8 billion
of foreign money invested in Turkish fixed income assets at
the end of March, something like $1.5 billion has pulled out
in April.
6. (Sbu) Candemir attributes the fall in the lira to these
foreign investors pulling out of fixed income instruments,
and the relative scarcity of local supply of Foreign Exchange
to meet foreign investors' demand. Retail investors may be
doing some buying of lira at the now-lower price, but
Candemir surmised that either the retail demand was not
sufficient or that banks were keeping the foreign exchange
sold by individuals because banks were bumping up against
their regulatory limits on FX open positions. Candemir and
Selim Atalay of Dow Jones continued to grumble about the
Central Bank's stop-and-go FX buying auctions: Atalay saying
the Bank's announcement that it would cease the auctions
until May 3 created market uncertainty about what would
happen next week.
7. (Sbu) More broadly, several contacts felt that the
fall-out from the Cyprus referendum continued to play a role.
Even though there was near-unanimity last week among
analysts that markets had priced in a yes vote in the north
and a no vote in the south, the higher-than-expected no vote
in the south may be troubling markets. Central Bank Markets
Department official Emrah Eksi echoed some private analysts
in saying Turkish markets may have expected too much of a
favorable reaction from EU officials to a yes vote in the
North, i.e. more praise than has been forthcoming for
Turkey's diplomacy.
8. (Sbu) Finally, both Selim Atalay of Dow Jones and Cem
Akyurek of Global Securities noted the important role of
market manipulation and speculation in the sharp fall in
equities. Atalay, claimed that manipulators had run up the
stock market over the past two weeks in the hope that
foreigners would move in after the North voted yes in the
Cyprus referendum, only to have to close their positions when
foreign buying failed to materialize.
9. (Sbu) Contacts expect more volatility over the coming
weeks and, possibly months, in the absence of a clear anchor
for markets. With regard to the Lira, however, there is some
hope for renewed appreciation, according to both Candemir and
Eski. Both agreed that the summer typically sees strong
Foreign Exchange inflows from tourism and from Turks abroad
visiting Turkey. Candemir is sticking with his prediction of
a stronger lira, though Eksi declined to make a prediction.
10. (Sbu) Finally, most contacts agreed that the volatility
was exacerbated by a high degree of herd-like behavior with
market participants buying or selling based on other
participants' actions.
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