Turkey's lira surged with stocks and bonds after the political party that President Recep Tayyip Erdogan cofounded swept back into office in the second parliamentary vote this year, ending months of political deadlock.
The lira jumped 3.2 per cent to 2.8249 against the US dollar at 4.33pm in New York (8:33am AEDT), the biggest increase in seven years. The Borsa Istanbul 100 Index soared the most since December 2013 and the government's 10-year bonds advanced as the yield plummeted to the lowest in more than three months.
"Although unexpected, AK Party's victory may be the optimal election outcome for near-term economic and asset dynamics in Turkey," Roxana Hulea, a London-based strategist at Societe Generale, said in an emailed note. The "sweeping win and the resulting fast-track - and long overdue - formation of a stable government could" lead to an outperformance of the lira "relative to its high yielding peers, notably the South African rand", she said.
The AK Party's win heralds the end of a political standstill that began in June, when it lost its majority for the first time since 2002. In the months that followed, coalition talks between parties collapsed and uncertainty over who would run the $US720 billion economy made Turkish assets even more vulnerable to a selloff across emerging markets, pushing the lira to a record low against the dollar and the yield on the government's two-year debt to the highest in six years.
Societe Generale predicted Monday that the lira will climb a further 3.6 per cent to 2.72 per dollar, its 200-day moving average, following the AK Party's victory, while Anadolubank said the currency may appreciate to 2.60 or 2.65. Ecstrat, an emerging-markets researcher, forecast stocks may rise as much as 15 per cent in dollar terms.
The Islamist-rooted AK Party took about 49 per cent of the vote and probably won 317 seats in the 550-member legislature with all ballots counted, according to official news agency Anadolu. The results are not yet official. The pro-Kurdish Peoples' Democratic Party, or HDP, looked set to win the 10 per cent of the vote it needs to gain parliamentary representation, diminishing the risk of increased tension between the government and Kurds.
Clashes between autonomy-seeking Kurdish militants and security forces have killed hundreds in Turkey's Kurdish- dominated southeast after a three-year cease-fire broke down following the election in June. HDP's success in meeting the "seat threshold should minimise mass violence even if they have minimal power", Ecstrat's London-based strategist Emad Mostaque said by email.
[ Ruling AKP regains majority - TURKEY ELECTIONS ]
The lira climbed the most in emerging markets and the yield on Turkey's 10-year bonds fell 38 basis points to 9.39 per cent. The Borsa Istanbul 100 Index increased 5.4 per cent led by Turkiye Garanti Bankasi and Akbank TAS, Turkey's largest listed lenders. The value and volume of shares traded soared to the highest since at least June 2012. The nation's banking index jumped the most in more than two years.
The result extended the AK Party's 13-year rule and may reignite the debate over constitutional changes that would lead to a government run by the president. The party needs at least 330 seats in parliament to call a referendum on the matter.
Erdogan and his loyalists may also resume pressuring the central bank to keep interest rates low, even as inflation misses the target set by policy makers, an example of the centralisation of power that threatens to send investors fleeing from Turkish assets, according to Cristian Maggio, the London-based head of emerging-markets research at Toronto Dominion Bank.
There "is a high probability of big changes here in terms of re-writing the constitution and centralisation of power in Erdogan's hands," Luis Costa, the chief fixed-income strategist for Central and Eastern Europe, the Middle East and Africa at Citigroup in London, said by phone. "President Erdogan will not stop here. This opens the gates for very important and market-challenging political decisions."
Concern over the implications of AK Party's win for companies associated with Erdogan's foes sent some stocks tumbling. They included shares of three publicly listed units of Koza-Ipek Holding, which was targeted in police raids last week and whose management was put into the hands of the authorities.
Koza Anadolu Metal Madencilik Isletmeleri, Ipek Dogal Enerji Kaynaklari Arastirma Ve Uretim and Koza Altin Isletmeleri were among biggest decliners on Monday. Koza-Ipek is accused of financing US-based Islamic preacher Fethullah Gulen, a former Erdogan ally who was declared the leader of a terrorist organisation following a 2013 corruption probe that Erdogan blamed on Gulen's followers.
Dogan Sirketler Grubu Holding, which owns national TV channels and newspapers, also retreated. Erdogan in September accused Dogan's honorary chairman, Aydin Dogan, of building a "life on lies".
The four companies were the only decliners out of the index's 100 stocks, with losses ranging from 2.4 per cent to 15 per cent.
The AK Party's victory will prompt investors to start focusing on what reform packages the government will introduce and the composition of the new economy team, said Selim Yazici, the chief executive officer of money manager Teb Portfoy Yonetimi in Istanbul.
"For a long time, all we've been talking about was politics," Yazici said. "Now we can focus again on the economy."
AK Party's win "greatly reduces" political uncertainty and improves the nation's risk profile, Goldman Sachs Group said in an emailed report. The cost of insuring the country's debt against default dropped to 239 basis points, the lowest since August on a closing basis.
"The market is relieved to see the country won't go over the same period of political bickering as it did following the June 7 elections," Alp Serbetli, a currency trader at Istanbul-based Anadolubank, said by email.