Global Investors Hold Breath as Turkey Sucks Air From Risk Rally

Global Investors Hold Breath as Turkey Sucks Air From Risk Rally Erhan Ortac/Getty Images

An encouraging week for global investors ended in anxiety as an attempted coup in Turkey thrust geopolitical tensions back to the fore, blindsiding bulls preparing to celebrate rallies from Tokyo to New York.

News that army officers were attempting to seize power came just in time to push U.S. equity futures lower in the last minutes of trading, flatten an exchange-traded fund tracking Turkish shares and send the lira to the worst drop in eight years. The sucker punch followed a week in which the S&P 500 Index broke through to records after a 13-month hiatus and global stocks jumped to an eight-month high.

With little to go on and nowhere to trade, investors were holding their breath.

“One of the things we’ve seen over the past few weeks is that the market can get things wrong pretty fast, so to make any really, really quick decision, you can get burned,” said Aaron Jett, vice president of global equity research at Los Angeles-based Bel Air Investment Advisors LLC. “How futures trade on Monday and the market opens on Monday will have more bearing on what’s going to happen in the equities market.”

Warplanes, Tanks

From terrorism in Paris and Brussels to Britain’s vote to secede from the European Union, assessing the market impact geopolitical stress has been a fact of life for global investors in the past year. The Turkish conflict follows a three-week stretch in which the MSCI All-Country World Index tumbled about 7 percent following the Brexit vote only to make it all back in the next 10 days.

On Saturday, Turkey’s leaders said they crushed the attempt to topple President Recep Tayyip Erdogan after hours of clashes through the night that saw tanks blockading roads, soldiers fighting police and warplanes bombing the parliament in Ankara. Almost 200 people, including dozens of coup backers, were killed and 2,839 military personnel were arrested, pro-Erdogan forces said.

Erdogan, who arrived at Istanbul’s international airport at about 6:30 a.m. local time from vacation at the Aegean coastal resort of Marmaris, blamed the plot on followers of U.S.-based Islamic preacher Fethullah Gulen -- a one-time ally-turned nemesis -- and promised swift punishment. "They will pay a heavy price for their treason," he said. A group backed by the preacher condemned military intervention in domestic politics in a statement on its website.

Spillover Effect

“It’s an important reminder that emerging markets still have a number of economic and political challenges,” said Paul Christopher, the St. Louis-based head global market strategist at Wells Fargo Investment Institute, which oversees $1.6 trillion. “It’s possible you’ll see spillover if people begin to question the emerging-market rally and return to looking more carefully at the fundamentals.”

The MSCI Emerging Markets Index has advanced 9.3 percent this year amid a mix of a recovery in commodities, a hunt for yield among low interest rates in developed nations and the prospect for continued global central bank stimulus.

Anyone trying to calculate an impact on U.S. markets might consider valuations. Helped by money flowing out of government bonds where yields hover near all-time lows, the S&P 500’s price-earnings ratio jumped above 20 this week for the first time in about seven years.

“It definitely gives people the excuse not to buy,” said Matt Maley, an equity strategist in New York at Miller Tabak & Co LLC. “Anybody who’s been buying here has been doing it because they have to. Even though valuations are high, they have to buy because the market is breaking out. Now that we have this news, it gives them the excuse to step back.”

‘Disaster for Turkey’

The iShares MSCI Turkey ETF lost 2.5 percent to $41.60 by the close of U.S. trading Friday. While U.S. stocks closed the regular session at 4 p.m. little changed, futures tracking the S&P 500 slipped after word of the Turkish conflict was reported. The September e-mini contract slipped as low as 2,143.25 at 4:45 p.m. in New York, down about 0.5 percent from its level 45 minutes earlier.

Political turmoil leaves Turkey’s economy vulnerable because it relies on foreign investment to finance a current-account shortfall. The deficit will widen to 4.5 percent of gross domestic product this year, from 4.4 percent in 2015, according to economists surveyed by Bloomberg.

“Even if this coup fails, it is a disaster for Turkey where the risk premium on the political side must move up sharply,” Emad Mostaque, a London-based strategist at emerging-markets consultancy Ecstrat Ltd., wrote in a note to clients. “This could also act as a catalyst for the next leg down in emerging markets as it sullies the entire asset class. We maintain that political risk is being underpriced by markets.”