Turkish markets extend losses on political crisis

By Daren Butler

ISTANBUL (Reuters) - Turkish shares and the lira fell two and three percent respectively on Tuesday as investors awaited a court ruling on an opposition challenge to the presidential election.

A second day of sharp losses was fuelled by media reports that the rapporteur for the Constitutional Court had recommended it reject the request by the main secular opposition party to the suspend the election for the Islamist-rooted government's candidate.

The sell-off, the biggest in nearly a year, grew as Citigroup cut its recommendation on Turkey stocks to underweight from overweight, citing a likelihood of prolonged political turmoil and less compelling valuations.

The lira fell 1.8 percent on the day to close at 1.3845 to the dollar on the interbank market, having slightly trimmed earlier losses. It closed on Monday at 1.3600.

That brought to 3.4 percent its loss since Friday, when Turkey's influential army criticized the government in a midnight statement and suggested it could intervene to protect secularism.

Istanbul's main share index fell 3.23 percent to 43,529.49 points, returning to closing levels seen in late March with a fall of 7 percent since Friday.

May Day protests in Istanbul, where 580 people have been detained, added to the tense atmosphere in Turkey.

"There is an extremely uncertain political atmosphere and this is unsettling investors. Citigroup has had an impact ... The Constitutional Court decision will be important and May Day (protests) are creating tension," said Tera Stockbrokers general manager Emre Tezmen.

The court has said it would try to issue a decision on Tuesday on the opposition's request to suspend the presidential election, a move which would trigger early parliamentary polls.

Parliament is due to hold a second round of voting on Wednesday after the ruling AK Party's candidate Abdullah Gul failed to secure enough votes at the first round on Friday.

Prime Minister Tayyip Erdogan has appealed for national unity amid a crisis which has thrust his Islamist-rooted government into conflict with secularists, including the army.

"If the court rejects the appeal it could be perceived negatively by the markets as papers claim that the AK Party will go ahead with Gul's candidacy. This may be perceived as an indication of ongoing tension with the army," said Raymond James economist Ozgur Altug.

The yield on the benchmark February 4, 2009 bond edged up slightly to 19.27 percent from a close of 19.22 percent on Monday when yields rose nearly one point.

Adding to perceptions interest rates in Turkey will stay higher for longer was data from Istanbul's Chamber of Commerce showing the city's consumer price index rose 3.4 percent month-on-month in April.

"The lira looks vulnerable and bond yields are likely to remain high, constraining upside for the equity market even if political tensions ease," Citigroup analysts Andrew Howell and Geoffrey Dennis said in a note to clients.