Turkey's lira, stocks and dollar bonds tumble as presidential runoff looms

Turkey's lira held near a two-month low, its sovereign dollar bonds tumbled and the cost of insuring exposure to the country's debt spiked as the presidential election appeared headed for a runoff with incumbent president Tayyip Erdogan in the lead.

Turkish bank stocks were also hammered in early trade, with the main banking index falling by more than 8%. (.XBANK)

The lira was at 19.65 to the dollar at 0833 GMT, after reaching 19.70 in earlier trading, its weakest since a record low of 19.80 hit in March this year following deadly earthquakes.

It was on track for its worst trading session since early November . The Istanbul bourse was trading more than 2% lower, after an earlier 6.38% drop triggered a market-wide circuit breaker.

Erdogan and opposition rival Kemal Kilicdaroglu were on track for a May 28 runoff vote after neither clinched the 50% of the vote to win outright. Observers said Erdogan's stronger-than-expected performance gave him the edge in that race.

"This is a major disappointment to investors hoping for a win for opposition candidate Kilicdaroglu and the reversion to orthodox economic policy he promised," said Hasnain Malik, head of equity research at Tellimer.

In the parliamentary vote, the People's Alliance including Erdogan's AKP was headed for a majority, meaning that even if Kilicdaroglu won a runoff, he would lead a split government.

Dollar-denominated sovereign bonds issued by Turkey fell sharply by more than 7 cents, while the five-year Turkey credit default swap spread jumped 114 basis points (bps) to 606 bps, according to S&P Global Market Intelligence, the highest since November 2022.

The presidential vote will decide not only who leads Turkey and shapes the foreign policy of the NATO-member country of 85 million people, but also how it is governed and how it tackles a deep cost-of-living crisis.

Last week, Turkish stocks and bonds rallied when third-party presidential candidate Muharrem Ince withdrew from the race, boosting expectations of a Kilicdaroglu win.

Richard Briggs, Candriam senior fund manager of emerging market debt, said the results were "almost certainly negative for markets" as an Erdogan win could mean a continuation of economic imbalance, unorthodox monetary policy and costly efforts to prop up the lira.

"If Turkey continues to run large current account deficits, once those flows halt or reverse, pressure on the currency and the economy could be severe without a credible policy framework which is less likely under the existing administration," Briggs said.

JPMorgan (JPM.N) had forecast that the lira could reach 24-25 to the dollar and Goldman Sachs calculations showed the market was pricing the lira to weaken by 50% in the next twelve months.

On Monday, lira volatility gauges fell, suggesting the currency could remain stable.

The lira has weakened 5% since the start of the year, and has lost almost 95% of its value over the last decade and a half as sugar-rush economic policies sparked spectacular boom and bust cycles, rampant inflation and currency market turmoil.