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Placid Putsch

July 18, 2016

Just when financial markets were beginning to calm down in a post-Brexit environment, and developments in regards to Conservative leadership and forward guidance from the Bank of England were seen by market participants as positive advances, financial markets witnessed another shock as a military coup in Turkey commenced Friday night. Right before the North American close reports began to hit the wires that a coup was underway in Turkey, causing risk correlated assets to drop into the close as the Turkish Lira plummeted. However, almost as quickly as the military coup began, the underwhelming putsch came to an end, with the military defectors quickly overtaken by government forces, helped by public protests towards the unorganized campaign that aimed to overthrow the government and President Erdogan.

Although one may conclude that given the succinct failure of the military coup in Turkey, financial markets will be able to shrug off any negative implications for broader risk appetite heading into Monday morning, there are a number of interesting continuing developments market participants should be aware of, as there is a possibility geopolitics don’t settle down right away. As the initial siege by the military defectors was underway, the Turkish government was quick to pin the blame for the coup on those factions within the military and government that sided with Islamic cleric Fethullah Gulen who resides in the United States under self-imposed exile. Not only has Gulen denied any part in the planning or execution of the coup, but has also responded that he would obey any extradition ruling from the United States, going as far as stating his belief the coup was organized by Erdogan in a bid to increase his presidential power within the Turkish government. Erdogan has stated an official request for Gulen’s extradition will be submitted to the United States, though at this time there hasn’t been a formal request. Secretary John Kerry has responded to the unofficial demands to hand over Gulen, and said the United States will make judgments appropriately based on any legitimate evidence the government of Turkey has in regards to Gulen’s involvement.

So while tensions between Turkey and the West are beginning to heat up over the involvement of Gulen in the failed coup, the immediate near-term consequences are that Erdogan will use this attack as a means by which to entrench the government and military, furthering his bid to consolidate power away from parliament and towards the presidency. What could be considered a “counter-coup” is already underway, as Erdogan has vowed to “systematically purge” all state institutions of Gulen supporters, which has led to approximately 6,000 people being detained. Given the swiftness of the crackdown on government opponents, it is not unreasonable to expect this number to grow in the coming days, and raises the political uncertainty. While it is likely that Erdogan and his AKP party will emerge from the failed coup in a stronger stance, the uncertainty will be if Erdogan uses this political momentum to call snap elections in a bid to secure a greater number of seats for the AKP party, furthering his goal of transitioning towards a presidential system.

We would expect the initial shock of Friday’s coup on risk appetite to dissipate into the week ahead, as the implications of the events over the weekend are likely to be viewed as localized by market participants, unless tensions between the United States and Turkey heat up over an extradition request for Gulen. There is the potential to see a bid in USD prevail relative to emerging market currencies, especially given that Turkey’s central bank has pledged unlimited liquidity to local banks as a result of Friday’s events. The accommodative monetary policy stance along with wider credit spreads will likely continue to weigh on the TRY in the week ahead, and while the events over the weekend are localized in nature, the risk off appetite has the potential to bleed into broader markets and continue to underpin the USD.


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