Turkey faces an economic crossroads after Istanbul elections
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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
