July 10, 2018 / 9:47 AM / a month ago

EMERGING MARKETS-Turkish assets pounded as new cabinet rattles investors

LONDON, July 10 (Reuters) - Turkish stocks and bonds tumbled on Tuesday as President Tayyip Erdogan cemented his power, installing his son-in-law as finance minister, while the lira steadied after suffering its biggest one-day fall since the July 2016 attempted coup.

Away from Turkey, MSCI’s benchmark emerging equities index dipped just 0.1 percent in the absence of further developments in the trade dispute between the United States and its key trading partners.

But Turkish assets took a major pounding in the wake of Erdogan’s cabinet unveiling as investors worried about the policy direction of Turkey’s new executive presidency.

Turkish stocks tumbled 2.3 percent, their worst one-day loss in a month, while bank shares plunged almost 4 percent and sovereign dollar bonds fell as much as 4.6 cents.

“It was widely expected that with this executive presidency Erdogan would take more control but he’s moved quickly and overtly to do this,” said William Jackson, senior emerging markets economist at Capital Economics.

The lira firmed 0.1 percent against the dollar after plunging more than 3 percent on Monday as former deputy prime minister Mehmet Simsek, who was seen as the main market-friendly minister, was left out of the new cabinet.

Conversely, the appointment of Erdogan’s son-in-law Berat Albayrak as finance minister, and the fact that the president will appoint the central bank governor and monetary policy committee members for four-year terms, has raised concerns about the bank’s independence.

Erdogan opposes current high interest rates, and Jackson said the central bank changes could mean it is more inclined to do the government’s bidding, exacerbating problems such as the credit boom and double-digit inflation.

“These moves have undermined some of the positive developments we had such as the hike in interest rates and the move to a single exchange rate,” Jackson said.

Reflecting concerns about the vulnerabilities of the Turkish economy, Turkish five-year credit default swaps leapt 22 basis points (bps) from Monday’s close to 297 bps according to IHS Markit data.

The average yield spread paid by Turkish sovereign dollar bonds over U.S. Treasuries on the JPMorgan EMBI Global Diversified index also surged, by 27 basis points to 420 bps.

Elsewhere, Chinese shares edged up another 0.2 percent after Monday’s 2.8 percent rally, their biggest one-day jump since August 2016. The gains came in the wake of plans to ease restrictions on foreign investment in the Shanghai and Shenzhen stock markets.

But China’s yuan dipped 0.2 percent after data showed June producer inflation accelerated to a six-month high, threatening to put more pressure on the country’s exporters amid tariffs levied by the United States. Annual consumer inflation also edged up.

Other bourses delivered a mixed performance. Indonesian shares gained 0.9 percent and Indian equities rose 0.7 percent but Hungarian stocks fell 0.4 percent.

Currencies were mainly on the backfoot with the South African rand down 0.6 percent and the Russian rouble and Mexican peso slipping 0.2 percent.

On Monday Mexican inflation data showed a bigger-than-expected jump in June. The central bank deputy governor said that the bank would err on the side of caution given high uncertainty and risks.

In emerging Europe the Hungarian forint fell 0.6 percent against the euro after data showed headline inflation rose to a 5-1/2-year high of 3.1 percent in June, above the mid-point of the central bank’s target, but not seen as strong enough to prompt the central bank to tighten policy.

The Polish zloty and the Czech crown also weakened, by 0.4-0.5 percent.

For GRAPHIC on emerging market FX performance 2018, see tmsnrt.rs/2e7eoml For GRAPHIC on MSCI emerging index performance 2018, see tmsnrt.rs/2dZbdP5

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For CENTRAL EUROPE market report, see

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For RUSSIAN market report, see) Emerging Markets Prices from Reuters Equities Latest Net Chg % Chg % Chg

on year

Morgan Stanley Emrg Mkt Indx 1074.76 -0.98 -0.09 -7.22

Czech Rep 1083.14 +2.21 +0.20 +0.46

Poland 2151.95 +0.25 +0.01 -12.57

Hungary 35609.95 -66.87 -0.19 -9.57

Romania 7886.10 +20.70 +0.26 +1.71

Greece 754.82 +5.07 +0.68 -5.93

Russia 1197.57 +4.40 +0.37 +3.74

South Africa 51903.58 -89.34 -0.17 -1.20

Turkey 96950.88 -2301.97 -2.32 -15.94

China 2827.44 +12.33 +0.44 -14.51

India 36146.20 +211.48 +0.59 +6.13

Currencies Latest Prev Local Local

close currency currency

% change % change

in 2018

Czech Rep 25.95 25.84 -0.42 -1.64

Poland 4.33 4.31 -0.49 -3.63

Hungary 325.47 323.38 -0.64 -4.59

Romania 4.66 4.66 +0.00 +0.45

Serbia 117.94 117.95 +0.01 +0.39

Russia 62.50 62.38 -0.19 -7.75

Kazakhstan 343.31 343.96 +0.19 -3.06

Ukraine 26.19 26.22 +0.11 +7.46

South Africa 13.48 13.40 -0.63 -8.34

Kenya 100.80 100.80 +0.00 +2.28

Israel 3.64 3.63 -0.17 -4.34

Turkey 4.71 4.73 +0.44 -19.59

China 6.63 6.61 -0.23 -1.83

India 68.82 68.65 -0.25 -7.25

Brazil 3.87 3.87 -0.00 -14.45

Mexico 19.23 19.22 -0.06 +2.17

Debt Index Strip Spd Chg %Rtn Index

Sov’gn Debt EMBIG 365 1 .14 7 77.34 1

Reporting by Claire Milhench; Editing by Susan Fenton

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