(Bloomberg) -- Turkey’s lira erased its gains as the prospect of U.S. sanctions over the country’s planned purchase of a Russian missile-defense system took the shine off Sunday’s landslide opposition victory in Istanbul.
The currency was little changed against the dollar as of 4:30 p.m in Istanbul, after earlier jumping as much as 1.8% as investors cheered an end to months of uncertainty going into the municipal vote. The main equity gauge, which added more than 2% at the open, was trading 1.2% higher.
It was “a classic relief rally, but its durability is questionable at this stage,” said Piotr Matys, a strategist at Rabobank in London. “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.”
Opposition candidate Ekrem Imamoglu won the redo of the Istanbul mayor’s race by a 9 percentage-point margin, which suggests President Recep Tayyip Erdogan’s AK Party won’t challenge the result again. The original vote in March had been overturned after the ruling party narrowly lost. But with delivery of the S-400 system to Turkey expected to start as early as the first week of July, investors are bracing for the U.S. to reprimand its NATO ally.
“The knee-jerk reaction was to buy the lira, but we expect rising political tensions ahead and so remain skeptical of this recent rally,” according to Win Thin, the New York-based head of currency strategy at Brown Brothers Harriman & Co.
One-month risk reversals on the dollar-lira pair, the premium traders pay for options to sell the local currency over those to buy, fell for a fourth day.
The leader of Erdogan’s key governing ally, Devlet Bahceli of the nationalist MHP, dismissed the prospect of an early national election, helping to remove another element of uncertainty for some traders. Erdogan has accepted the outcome of Sunday’s election, but has hinted the new mayor could run into legal problems.
While the market is rightly welcoming the fact the results of this election won’t be contested, investors will be looking for answers for what comes next, said Inan Demir, an economist at Nomura Plc in London. “Will there be more populism? Will there be a cabinet reshuffle? Will there be increased nationalist influence?”
Apart from resolving the brewing geopolitical spat with the U.S., investors are eager to see authorities press on with mending the beleaguered economy, which is at risk of a double-dip recession. The lira has lost over 8% of its value this year, the worst-performer in emerging markets after the Argentine peso.
The Borsa Istanbul 100 Index, among the cheapest in developing nations, has added 4.3% in 2019.
--With assistance from Yumi Teso, Karl Lester M. Yap, Tomoko Yamazaki, Michael G. Wilson, Onur Ant and Amy Teibel.
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