IBEX 35 Dragged Down by BBVA and IAG, Turkish Lira Volatility Peaks

Key Talking Points:

  • Turkish central banker removed as Erdogan does not agree with his hawkish views
  • European airlines take a dive as summer holidays in Europe seem unlikely
  • IBEX 35 falls below ascending trendline and key Fibonacci support

Equities Forecast

Equities Forecast

European equities have started the new week focusing on the developments over the weekend in Turkey, where President Erdogan has replaced the Central Bank Governor a day after the institution decided to increase interest rates. This marks the third time that Erdogan has abruptly fired a central bank chief since mid2019 as hawkish Naci Agbal is being replaced by Sahap Kavcioglu, a skeptic of high interest rates.

This latest episode of political meddling has caused a surge in Turkish Lira volatility with the USD/TRY surging as much as 15% on the open on Sunday, as investors fear that the new chief will not be able to foster an environment for a stable currency underpinned by positive real interest rates. Many suspect that Kavcioglu’s dovish views will lead him to undo some of the recent policy action that was taken to curb a falling Lira and inflation of nearly 16%.

How to Manage the Emotions of Trading

Expect today to remain a highly volatile session for the Turkish Lira and those assets with large exposure to Turkey, like the Spanish Stock index. The IBEX 35 has been picking up bearish momentum since European traders have come online, with the stock mostly being led lower by BBVA, given the bank’s large exposure to Turkey.

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The Spanish bank owns about 49.8% of Turkish bank Garanti, which accounts for just over 9% of its assets, and had previously benefitted from the larger than expected increase in Turkish interest rates last week, given the expected increase in the country’s profitability. But Erdogan’s removal of Naci Agbal has seen BBVA’s shares tumble around 6.6% up until the time of writing, leading the losses in the Spanish stock index, only behind the airline conglomerate IAG (-7.44%), which is reacting to the vaccine dilemma and increase in Covid-19 cases in Europe threatening the summer holiday period.

IBEX 35 Levels

The Spanish index is looking very vulnerable at current prices given how it has fallen below the 61.8% Fibonacci (8,450) which had been a strong area of support. Its price has also pierced the ascending trendline from the lows in January, which is putting extra selling pressure on the index. At this point, expect to see the IBEX 35 retrace towards its 50- and 100-day SMAs, which are converging around the 8,220 level, if bearish pressure continues.

Momentum indicators are showing that further selling may arise but an overstretched stochastic may be signaling that short-term support will make it hard for sellers to continue heading lower. For now, 8,330 seems to have attracted sufficient buying interest to halt further declines, but I doubt to see the IBEX 35 turn positive in today’s session, so it may consolidate in the near-term before it makes another move.

IBEX 35 Daily chart

IBEX 35 Dragged Down by BBVA and IAG, Turkish Lira Volatility Peaks

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— Written by Daniela Sabin Hathorn, Market Analyst

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