Stock Market Over-reaction

Bloomberg writes:

"Erdogan's party escaped a ban when the country's high court rejected charges that he sought to introduce Islamic law in violation of a constitutional mandate for a secular government. The win gives Erdogan a chance to pursue democratic reforms and European Union membership.

To succeed, he may need to abandon policies favored by his Islamist power-base, such as ending curbs on Muslim-style headscarves.

``Now Erdogan has to decide if he's going to behave,'' said Bulent Aliriza, head of the Turkey program at the Center for Strategic and International Studies in Washington. ``There will be pressure from hardliners in his party to be firmer on the Islamist agenda.''

...Yields on lira bonds fell as much as 89 basis points, the most since July 2006. The benchmark stock index gained 2.8 percent at midday in Istanbul and the lira rose to a six-month high of 1.164 per dollar. "

ISE-100 index opened above 43000 level today. This is a gross over-reaction in my opinion. AKP had great accomplishments in the past but they have not been performing well until the announcement of the lawsuit. Since then they erased the budget deficit and inflation went down unexpectedly in July due to a decline in food prices. These are temporary factors though. Now that they are cleared, they will continue their populist policies and inflation will resume in August and September. Bond yields will increase towards 21% and stock market will plunge at least 10% from current levels.