March 25, 2014 / 10:30 AM / 3 years ago

Turkish assets steady but political tensions persist

3 Min Read

* Capacity usage, manufacturing confidence due at 1230 GMT

* Political tension ahead of local elections weighs

* Syria, Ukraine pile pressure on Turkish assets

* 5-year CDS spread close to 7-week highs

By Dasha Afanasieva

ISTANBUL, March 25 (Reuters) - Turkish assets were steady on Tuesday, helped by technical adjustments, but political tensions weighed and the finance minister warned a poor result for the ruling party in Sunday's local elections could hit economic growth.

"Slight gains in Turkish markets look to be a technical reversal and today both global and local markets are pricing in political tensions," said Erkan Dernek, market strategist at Odeabank.

Turkish credit default swaps (CDS) were climbing, as the election approached, Dernek said, and turmoil in nearby Syria and Ukraine was exacerbating Turkey's risk profile.

Turkey's five-year CDS, used to protect against default, were quoted close to seven-week highs at around 260.5 basis points (bps), according to Markit.

Markets were also awaiting Turkish capacity usage and manufacturing confidence data for March, due to be released by the central bank at 1230 GMT.

The main Istanbul share index was up 0.45 percent at 64,001 at 0919 GMT, outperforming the main emerging markets index which was up 0.07 percent.

Turkey's 10-year benchmark bond yield fell to 11.29 percent from 11.36 percent at Monday's close. The lira firmed to 2.2360 against the dollar, from 2.2380 late on Monday.

Just days ahead of the local elections, Prime Minister Tayyip Erdogan last week tried to shut down the social networking site Twitter in Turkey, following almost daily releases of audio recordings that purport to reveal corruption in his inner circle.

Candidates continued on the campaign trail on Tuesday. Finance minister Mehmet Simsek told Reuters that the economy is likely to grow 4 percent this year but it might miss that target if the ruling AK Party fails to get 40 percent of the vote on Sunday. The party won a third term in power nationally in 2011 with almost 50 percent of the vote.

Sunday's local election is widely being seen as a referendum on Erdogan and his AK Party's rule and comes ahead of a presidential race in August in which he could be a candidate.

Simsek said that political uncertainty would be reduced if the AK Party gains more than 40 percent of the vote on Sunday.

Besides tension at home Turkey is also facing turmoil in two of its neighbours.

The crisis in Ukraine, just across the Black Sea from Turkey, rumbled on with the new leadership circulating a draft resolution to the U.N. General Assembly that would declare invalid Crimea's recent referendum calling for annexation to Russia.

Over the weekend, Turkey's armed forces shot down a Syrian plane, near an area where Syrian rebels have been battling President Bashar al-Assad's troops for control of the Kasab border crossing, alleging that it had violated Turkish airspace.

Additional reporting by Carolyn Cohn; Editing by Susan Fenton

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