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GLOBAL MARKETS-Turkey coup impact seen limited but instability fear remains

Published 18/07/2016, 02:14 am
© Reuters.  GLOBAL MARKETS-Turkey coup impact seen limited but instability fear remains
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* Little immediate developed market impact seen from coup

* Instability in key emerging market would spook investors

* Some see risk aversion as investors hedge Turkey exposure

By Nigel Stephenson

LONDON, July 17 (Reuters) - Turkey's failed military coup may prompt some flight to safe-haven assets on Monday but there will only be a more serious longer-term impact for investors if instability persists in the strategically important emerging market.

Strategists and economists said on Sunday the fact that the coup, launched while U.S. markets were still trading on Friday, had been put down would limit its impact on developed markets.

However, investors would be concerned at how the aftermath of the plot plays out in a country seen as a key player in the Syrian crisis and in efforts to control the flow of migrants into Europe.

Turkey's government said on Sunday it was in full control of the country and economy. The authorities rounded up nearly 3,000 suspected military plotters and the same number of judges and prosecutors after forces loyal to President Tayyip Erdogan crushed the coup, in which at least 290 people were killed.

Deputy Prime Minister Mehmet Simsek said the government had decided on "all necessary measures" after consultation with the central bank and the treasury. The central bank said it would provide unlimited liquidity to banks.

"I would not expect a major impact, the way we saw a rush to safe assets after Brexit, but there will be questions raised about Turkey's role," said Keith Wade, chief economist at asset management company Schroders (LON:SDR).

"If it did become unstable, it would become a concern for investors because clearly it plays a critical role in the Syrian crisis," Wade said.

As the attempted coup unfolded on Friday, safe-haven assets including the Japanese yen JPY= and gold XAU= gained while yields on low-risk U.S. Treasuries US10YT=RR pulled back from three-week highs. Oil prices also rose after the coup plotters said they had seized control of the country, whose neighbours include Syria, Iraq and Iran.

The Turkish lira TRY=D4 hit a three-week low against the dollar in late Friday trading.

Lena Komileva, managing director at G+ Economics in London, said on Sunday there could be some further risk aversion on Monday as emerging market investors hedged Turkish assets.

"While the failed coup has not changed the political status quo within Turkey, it will attach a higher risk premium to Turkish assets, which will lead to some rise of risk aversion as global investors hedge Turkish exposure," she said.

"It is probably not going to have a very lasting and deep shock like Brexit," Komileva said.

GEOPOLITICAL NOISE

Ian Gunner, portfolio manager at the Altana Hard Currency Fund, expected no major reaction in developed markets on Monday. The failed coup was likely to be seen as "just more geopolitical noise, and we are getting lots of it at the moment".

However, markets would closely follow the Turkish government's response to the coup for any implications for Turkey's chances of joining the European Union.

Markets have shown little and very short-lived reaction to a series of terrorist attacks in Europe in recent months, viewing them as one-off events with limited economic consequences.

"There is an initial impact and you do get these flights to safety but it does wear off very quickly," said Neil Mellor, currency strategist at Bank of New York Mellon (NYSE:BK) in London. (Editing by David Clarke)

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