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Risk Appetite suffers as tensions rise after Turkey shoots down Russian warplane

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Nov 25, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Mumbai) - Moscow and Ankara are currently at loggerheads after Turkey shot down Russian Su-24 over the Syrian border for air space violation. Turkey has refused to accept Russia’s claims that "for the entire duration of the flight, the aircraft was exclusively over Syrian territory". In a letter to the U.N. Security Council, Turkey explained the aircraft had flown more than a mile into Turkey for 17 seconds, despite being warned 10 times in five minutes.

    Footage from private Turkish broadcaster Haberturk TV showed the warplane crashing in a wooded part of an area known by Turks as "Turkmen Mountain". According to Turkey's Dogan News, the Russian pilots were shot down while parachuting down after the warplane was shot down.

    France's Hollande, America's Obama, and NATO's Stoltenberg have urged Russia not to escalate the situation. Putin however looks in no mood to take the incident lightly. It seems NATO and Obama has confirmed Turkey's claims that Russia invaded its airspace. This has been rebuked by Russia which decided to move a Cruiser 'Moskva' off the coast to strengthen air-defenses. Putin has called Erdogan a “backstabber” and an ISIS supporter and has warned of serious consequence. Sergei Lavrov has called off a planned trip to Turkey.

    The incident dented a hole in the hope of betterment in the relationship between Russia and the West. The relationship had shown glimpses of strengthening post Paris attack, which had led to calls for a united front to fight the jihadist group in Syria.

    Market reaction

    The geo-political tension fuelled by the shooting down of Russia’s warplane by Turkey had huge market repercussion. Russia's main stock index fell more than two per cent, while Turkish stocks fell more than four per cent. Stocks at the Borsa Istanbul fell 1.4% on yesterday.

    Rouble as well lira was weak. The lira shed 1 per cent against the dollar. Even before the incident, lira had fallen about 19 per cent against the dollar so far in the year, becoming the weakest performing emerging market currencies. Rouble on the other hand had dipped 0.2 per cent against the dollar.

    The news also pushed European markets lower. Security concerns hit the risk appetite and weighed on market sentiment. Traders have been inclined towards safe heavens like gold and treasuries. If the problem escalates further it will result in bigger reaction.

    Impact on Turkey’s economy

    Elections in Turkey go over just some time back. Ruling AK party’s victory had pronounced some relief for investors, who were stuck in political uncertainty for months. The markets are however poised to become turbulent again in the backdrop of yesterday’s incident.

    Turkey's growth has dipped in recent years. The economy is expected to grow by 3.1% this year and 3.6% in 2016, far below the 9 per cent it experienced in 2010 and 2011. Turkey will also have to bear the shock of the U.S. December interest rate hike. Turkey has borrowed heavily in dollars and its imports are much more than it exports. Hence Turkey has all the reason to fear higher U.S. interest rates.

    At a time when the Turkish economy already seems to be in rough waters, the incident will lead to large capital outflow from the country. Investor sentiment will take a beating resulting in the Turkish market to fall.
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