LONDON: Turkish stocks fell almost 2 percent on Thursday to eight-week lows and default insurance costs surged after the country's prime minister looked set to leave after clashing with President Tayyip Erdogan.
The Turkish woes came against a backdrop of generally lacklustre emerging equity markets which are being rattled by signs of a renewed and prolonged downturn in world growth with little sign of any pick up in developing countries.
Istanbul-listed stocks are track for their biggest weekly drop since December 2013, with losses of more than 8 percent so far, while local 10-year bond yields jumped more than 30 basis points to near one-month highs.
Five-year credit default swaps rose to four-week highs .
Turkish officials said the ruling AK Party was set to replace Prime Minister Ahmet Davutoglu, a political moderate who has been embroiled in weeks of public dispute and seemed unable to resolve their differences in a 1-1/2 hour meeting on Wednesday.
Davutoglu's departure, expected to follow an extraordinary congress in the coming weeks, is seen to pave the way for a successor more willing to back Erdogan's ambition of changing the constitution and strengthening his grip on power.
The Turkish lira strengthened 1.3 percent, though only clawing back part of the 3.8 percent losses suffered in the previous session.
"While the political situation stabilised after the AKP regained its majority in the early general election held in November, politics has once again emerged as a major risk for the lira, which is likely to remain vulnerable in the coming days," Rabobank analysts said.
Investors will likely focus on which ministers retain key posts in the new cabinet, especially market-friendly names such as Mehmet Simsek.
"Clearly changes to economic minsters could result in changes to economic policies (crucial given Turkey's border-line investment grade rating," BNP Paribas said in a note.
Overall, MSCI's emerging market index fell 0.4 percent on the day - on track for its third week in the red with weekly losses of almost 4 percent.
Russian stocks rose half a percent and the rouble firmed 1.3 percent in line with oil's 2.5 percent gains .
In central Europe, the Czech and Romanian currencies were flat versus the euro before central bank meetings that are expected to result in no-change decisions.
Hungarian stocks rose half a percent, shrugging off a 19 percent fall in drugmaker Richter's first quarter profits. Richter shares opened weaker to touch six-week lows but later recovered to trade in positive territory.
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