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Heavy unwind in Turkish lira
Turkey has it all for making the headlines today. The central bank decision, the new cabinet announcement and a Russian jet shot by its Syrian border to add some more colour to the picture.

The deep opinion divergence between the President Erdogan and PM Davutoglu delays the formation of the new cabinet. The political uncertainty is a source of stress in the Turkish stock and bond markets. The BIST 100 index has given back the two-thirds of post-election gains and stepped below the 80000 mark for the first time in November. The BIST is still in the bullish consolidation zone off its August lows (69797). A slide below 78793 (Fib 38.2% retrace) could signal a further weakness, if especially the US dollar adds on strength before the FOMC’s December meeting.

The lira is 0.83% lower this morning. Turkey’s Central Bank will give policy verdict today and is expected to sit on its hands as there is little incentive to move before the formation of the cabinet and more clarity on Turkey’s political and fiscal path.

The rising geopolitical tensions in Turkey’s Syrian border are will dent investor appetite for Turkish assets. In fact, the recent fall in the FX volatility has been beneficial for carry traders parking their cash in the lira. In return, the appreciation in lira has given a bump to Turkish stocks, because of their high level of foreign debt. With the rising volatility in the lira, the aversion in regards to Turkish stocks and bonds may increase. Investors are naturally demanding a higher premium to match the country risk. Central Bank’s retention on action could again accumulate tensions and require a bigger move in the future.

The rising US yields could accentuate the capital outflows out of the Turkish stocks as the Fed walks decidedly toward hiking its rates in December.