Iraq violence keeps pressuring markets

LONDON - Reuters

Violence in Iraq has continued to adversely affect Turkish markets, as many local firms had shifted their focus to neighboring country in recent years.

Turkish markets fell on June 13 on the escalating violence in neighbouring Iraq, while the rand weakened following an outlook downgrade for South Africa.

Sunni Islamist militants gained more ground in Iraq overnight, moving into two towns in the eastern province of Diyala, while U.S. President Barack Obama considered military strikes to halt their advance towards the capital Baghdad.

Turkey, which has been suffering from a large current account deficit, switched some of its export focus to Middle Eastern countries like Iraq following the eurozone debt crisis.

“Iraq has been one of Turkey’s fastest-growing export markets - I don’t think we can downplay the events in Iraq in the context of Turkey needing to cut the current account deficit,” said Neil Shearing, head of emerging markets research at Capital Economics.

The lira fell 0.5 percent to a nine-day low and Turkish stocks also fell 0.5 percent, towards the previous day’s two-week low.

Iraq’s 2028 dollar bond has dropped five cents this week to 90.75 cents on the dollar and Iraqi spreads have widened 70 basis points to 462 bps over U.S. Treasuries.

Brent crude oil also pared gains but remained above $113 a barrel on Juen 13 on easing concerns that an insurgency in Iraq would trigger a sudden and significant halt in its oil exports.

“The market in general is trying to assess the risks on Iraq. There was a big market reaction and then the IEA (International Energy Agency) said it did not see a risk to supplies so the volatility is reflecting this,” Olivier Jakob at Petromatrix consultancy said.

Most of Iraq’s current oil exports come from south of Baghdad, still far from the Islamist rebel fighters. Should they reach south of Baghdad, analysts expect them to encounter much greater resistance.

Iraqi exports from the north are considered safe for the moment, analysts said, as the major Kirkuk oil hub is held by Kurdish forces.