Turk markets firm on Fed hopes, but still eyeing headscarf issue

ISTANBUL – Turkey’s lira, bonds and shares all rose yesterday, sharing in global market hopes of further US Federal Reserve rate cuts this week and shrugging off domestic concerns about plans to ease a ban on the Muslim headscarf. The high-yielding lira rose nearly 1 percent to 1.1760 against the dollar in interbank trade from its close on Monday of 1.1875, benefiting from lira buying to meet month-end tax payment requirements. Analysts said expectations of a new rate cut in the United States after last week’s surprise 75 basis points reduction boosted risk appetite and backed the lira. «The Turkish lira is highly correlated to core equities. This correlation seems to suggest that when global stocks pick up, the lira can be expected to behave in a similar fashion. There appears to be a respite in the high levels of risk aversion that we have had recently,» said UBS EMEA strategist Roderick Ngotho. Istanbul’s main stock index rose 1.98 percent to 44,572.70, recouping a portion of the 4 percent losses on Monday. It outperformed the emerging market stock index, which rose 1.23 percent. Global stocks rose as the Fed, which cut key rates by 75 basis points last week, was widely expected to cut rates again today. In Turkey, investors were also closely following a plan to ease a ban on the Muslim headscarf in universities, with the ruling Justice and Development Party (AKP) and opposition MHP set to submit their proposal to parliament yesterday. «This issue will not currently have a clear impact on financial markets but developments will have to be watched closely if the atmosphere in foreign markets worsens again,» HSBC economist Fatih Keresteci said. Turkey’s economy remains especially vulnerable to shifts in global investor sentiment due to its large current account deficit. «I do not have faith in this rally. The lira benefits from carry trades and some foreign direct investment inflows. Both scenarios are at risk… With the lira at 1.1777, the USD/Turkish lira upside has a real potential to materialize,» said Ngotho. Among shares in focus, Akbank rose 3.6 percent to 7.20 lira after its CEO said the bank aimed for its assets to have a market share of 20 percent in 2011, up from 13.5 percent in 2007. The yield on Turkey’s benchmark October 7, 2009 lira bond fell to 16.28 percent from 16.41 percent on Monday. Dealers said the fall in bond yields was being restrained by caution ahead of the release of January inflation data on February 4. The central bank, which has cut interest rates five times in as many months, has said that despite risks from food and energy prices, inflation was expected to keep falling. The bank yesterday urged fiscal discipline at a time of shrinking global risk appetite and said second-round effects were a basic risk to the inflation outlook. It also said a sharper-than-expected global slowdown could hurt the inflation outlook by reducing portfolio flows and weakening the lira. Analysts said the comments, from minutes of the bank’s last meeting, sounded more cautious than before, but the market was broadly unchanged.