(Bloomberg) -- Turkey’s lira sank, an equity selloff triggered a trading halt, and government bond yields surged to the highest levels this year as investors dumped the nation’s assets after the arrest of a key rival to President Recep Tayyip Erdogan.
The lira plunged more than 10% to new record lows on news of the arrest early on Wednesday, before paring losses to about 6% as of noon in Istanbul. The benchmark Borsa Istanbul 100 Index was also down 6%, with the banking sub-index dropping more than 9%. The declines were the worst in the world among respective asset classes.
Istanbul’s mayor, Ekrem Imamoglu, was detained Wednesday morning, a day after Turkish authorities revoked his university diploma in a move that could bar him from challenging Erdogan in the next presidential election. Among Turkey’s most popular politicians, the 54-year-old is seen as top contender, and he was set on Sunday to be named the presidential candidate for the Republican People’s Party, or CHP.
“Turkish assets are under strong selling pressure,” said Piotr Matys, senior FX analyst at In Touch Capital Markets. “To some investors it’s also a reminder that President Erdogan intends to tighten his grip on power even more by attempting to prevent his biggest political rival from running in presidential elections due in 2028, although early polls can’t be excluded.”
Political developments usually weigh on Turkish stocks as the country’s equity market is mostly dominated by domestic investors who are more reactive at times of volatility. Local investors hold about 62.5% of Turkish equities, according to data on the Turkish securities depository’s website.
The political developments come as a shock to global investors, who had largely turned positive on Turkey, betting on its pivot to economic orthodoxy and insulation from trade tensions with the US. A better-than-expected inflation reading in February, an interest-rate cut and hopes of closer ties with the European Union all helped push Turkish stocks into a bull market earlier this month, while the lira carry trade was still viewed as attractive.
The selloff on Wednesday morning also echoed in forward markets. Overnight offshore rates jumped more than 10 percentage points to 48%, signaling an unwinding of lira carry positions.
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