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Turkey faces an economic crossroads after Istanbul elections

Data: Investing.com; Chart: Axios Visuals

Investors are again getting bullish on emerging markets, as the Fed is expected to cut interest rates and the dollar is expected to fall in value. That should mean a strong environment for EM economies to perform.

Yes, but: Things have gotten tougher for many of the world's largest emerging countries, especially Turkey, which finds itself at a major crossroads following elections in Istanbul.

Driving the news: The lira saw the biggest gains in the global FX market, rising nearly 2% against the dollar Sunday after the city's mayoral election was again won by a candidate running against Turkish President Recep Tayyip Erdogan's party. (The same candidate won in March, but Erdogan ordered a mulligan, claiming fraud.)

  • However, much of the luster wore off Turkey's currency in trading Monday, and the lira shed most gains.
  • It was "a classic relief rally, but its durability is questionable at this stage," Piotr Matys, a strategist at Rabobank in London, told Bloomberg. "Apart from fixing the economy, the Erdogan administration must find a solution to the diplomatic conflict with the U.S. over the Russian S-400 defense system to avoid sanctions."

Background: It's been exactly one year since Erdogan won re-election and his handling of the economy, central bank and foreign policy have put investors on edge.

  • Analysts expect the central bank, led by Erdogan loyalists, will soon cut interest rates, after inflation fell below 20% in May.
  • There is also growing fear about a confrontation between Erdogan and President Trump at the G20 summit this week after Turkey purchased a missile defense system from Russia.
  • Turkey's stock market is at its lowest level in nearly a decade in dollar terms, largely because the lira has lost about a quarter of its value since 2017.

Go deeper: Emerging markets are hot again after a rocky 2018