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More Tumult For The Turkey ETF

ETF Professor

Volatility is often the name of the game with the iShares MSCI Turkey ETF (NASDAQ: TUR) and that has been the case in recent trading sessions.

After plunging last week amid speculation the lira is facing another crisis, TUR, the lone U.S.-listed exchange traded fund dedicated to Turkish equities, was trading higher by more than 4.6 percent late Monday on volume that was almost double the daily average.

What Happened

Last week, it was reported Turkey's official reserves unexpectedly declined, pushing the central bank there into surprise tightening measures that did little to stem the lira's slide. Turkish authorities have a history of clashing with international banks and credit ratings agencies when volatility spikes in the country's financial markets and that tradition was renewed following last week's lira plunge.

Turkey said it's probing JPMorgan and other banks.

“The BDDK watchdog said on Saturday it received complaints that a report JPMorgan published on Friday hurt the reputation of Turkish banks and caused volatility in financial markets. The necessary 'administrative and judicial processes' would be followed, it said,” reports Reuters. “The Capital Markets Board of Turkey (SPK) also said it had launched a probe after receiving complaints that a JP Morgan report was 'misleading' and caused speculation on the Istanbul bourse.”

Why It's Important

Bearishness as it pertains to Turkish banks is relevant to U.S. investors considering TUR because the fund devotes 29.07 percent of its weight to the financial services sector, its largest sector weight.

TUR still sports a modest year-to-date gain, but beyond last week's volatility, wider-ranging issues within the Turkish economy could portend more downside for stocks there.

“We now expect the economy to contract in 2019 year-on-year, and the recovery to be slower,” said Fitch Ratings in a recent note. “Maintaining consistent monetary and fiscal policy settings in the face of lower growth remains a key measure of economic policy credibility.”

Fitch expects Turkey's 2019 GDP to contract by 1.10 percent, down from a previous estimate of 0.60 percent.

What Happened

Even with the U.S. dollar sluggish this year, Turkey still faces headwinds in the form of external financing requirements.

“A large external financing requirement means the pace of Turkey's economic rebalancing and recovery faces risks from the country's economic policy mix,” according to Fitch. “Notably, premature monetary loosening could renew pressure on the lira, while the marked slowdown could continue to challenge the commitment to fiscal discipline. It remains to be seen how far the authorities will use the end of the current electoral cycle, following the local elections on 31 March, to embark on structural reforms that would reduce macro-economic volatility and strengthen the policy framework.”

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