Traders Brush Off Turkey Sanctions, But Warn Worse Could Come

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© Reuters. Traders Brush Off Turkey Sanctions, But Warn Worse Could Come© Reuters. Traders Brush Off Turkey Sanctions, But Warn Worse Could Come

(Bloomberg) — Investors in Turkish markets brushed off Monday night’s U.S. sanctions, though some warned that harsher penalties could still come.

The strengthened as much as 1% before paring gains to 0.2%, trading at 5.9142 per dollar as of 11:48 a.m. in Istanbul. Turkey’s main climbed 1.5%. Those moves only partially eroded losses that have made Turkish assets among the worst performers in emerging markets this month.

Since President Donald Trump warned on Oct. 7 that he could “obliterate” Turkey’s economy if Ankara did anything he considered “off limits” with its incursion into Syria, traders have braced for sanctions that would deal a severe blow to the Turkish financial system.

“It’s a short-term relief,” said Piotr Matys, a strategist at Rabobank in London. “The risk that far more consequential and punitive measures could be used by the U.S. prevails as the military operation in northern Syria continues.”

For now, Washington is sanctioning three senior Turkish officials and increasing steel tariffs. The penalties may have little impact on the wider economy and are in line with measures adopted last year, which were subsequently removed as relations between the NATO allies improved.

Much depends on how Turkish President Recep Tayyip Erdogan responds. On Monday, he said the offensive in Syria would continue no matter what.

“I fear that Erdogan will not be able to help himself, and we will see retaliation,” said Timothy Ash, a strategist at BlueBay Asset Management in London. “If they decide to respond, tit for tat, it could get ugly with a game of escalation between the two sides.”

The sell-off this month has created opportunities for investors brave enough to jump in. Real yields on Turkish local-currency government bonds have climbed to the highest level in a year. The Index of equities fell more than 5% on Monday and touched it’s lowest level since June.

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