Arrest of Erdogan rival shakes Turkish stocks while lira slumps and bond yields rise

The Borsa Istanbul 100 Index fell almost 7 per cent at open, causing an automatic halt in trading

Supporters and municipality workers hold a rally in support of Istanbul Mayor Ekrem Imamoglu following his detention over a corruption probe outside Sisli municipality headquaters in Istanbul, on Wednesday. AFPShow less

Stocks in Turkey sank on Wednesday, its currency slumped while the yield on government bonds increased as investors fled markets after political temperatures rose with the arrest of President Recep Tayyip Erdogan's leading rival.

The Borsa Istanbul 100 Index fell almost 7 per cent at opening, which led to a halt in trading under the bourse’s circuit-breaker rules. Stocks resumed trading 4.6 per cent down when the bourse reopened and were trading 5.85 per cent lower at 1.28pm UAE time.

Of the 100 members of the benchmark gauge, 97 declined and only three managed to climb into green. Banks were the biggest losers, with Yapı Kredi slumping 10 per cent and AKBank slipping 9.9 per cent.

Sovereign 10-year bonds dropped, sending yields 175 basis points higher to 29.94 per cent. The lira tumbled beyond 5 per cent against the US dollar as the declines were the worst in the world among respective asset classes, according to Bloomberg data.

Turkish assets took a bruising after Istanbul Mayor Ekrem Imamoglu was arrested on Wednesday as part of a corruption investigation, according to Turkish media reports.

Local news outlets reported that a large group of security officers surrounded Mr Imamoglu’s home to take him into custody.

Early on Wednesday morning, Mr Imamoglu’s media adviser Murat Ongun said in a post on X that he was being detained. Mr Imamoglu said that hundreds of police were in front of his house but he would not give up and would continue resisting pressure.

Turkish authorities have also ordered the arrest of about 100 other suspects, including journalists and business people, as part of the same corruption investigation.

Mr Imamoglu was likely to be nominated as his party's candidate this week for Turkey's next elections. His arrest came a day after his university diploma was annulled, disqualifying him from running for the presidency.

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According to Turkey's election laws, a candidate must have a university degree to run for president. The graduations and degrees of Mr Imamoglu and 27 others were declared void because of an “obvious error”, Istanbul University announced at the time.

“Turkish assets are under strong selling pressure,” Bloomberg quoted Piotr Matys, senior FX analyst at In Touch Capital Markets, as saying.

“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.”

The cross-asset sell-off in Turkey on Wednesday morning was also reflected in forward markets, with the overnight offshore rates rising more than 10 percentage points to 48 per cent, signalling investors unwinding their lira positions.

The Turkish lira on Wednesday dropped to as much as 41.29 to a US dollar but clawed back some of the losses to trade at 38.37 a dollar.

Economic struggles and inflation

The country has been battling with chronic inflation for the past two years, although the government’s disinflation strategy has lowered it close to 40 per cent in February after peaking at more than 75 per cent last year, according to government data.

Turkey’s economy has also struggled to maintain growth momentum despite Ankara’s push to stimulate economic activity. The International Monetary Fund expects it to expand by 2.7 per cent this year, slower than 3.2 per cent recorded last year.

There are signs of recovery and S&P Global upgraded Turkey's credit rating twice last year citing the impact of the tight monetary stance that has helped stabilise the economy.

The country's long-term sovereign credit rating was raised to BB- from B+, though its outlook was revised to stable from positive, S&P said said at the time.