The HSBC MSCI Turkey UCITS ETF (HTRY) was the best performing ETF listed in Europe last week following a phone call between US President Donald Trump and Turkish President Recep Tayyip Erdogan, however, tensions have since mounted.

During the call on 29 May, the two discussed Ankara’s decision to purchase Russian S-400 missile defence systems, a move that will lead to automatic US sanctions while also agreeing to have a meeting at the G20 summit later this June.

On the news, Turkey’s lira, which has fallen 14% this year, jumped almost 1.5% on expectations of improved ties with Washington, while the Borsa Istanbul 100 index rose 5.9% over the week to 31 Friday.

ETFs rode of the back of this strong performance with HTRY jumping 12.7% over the same week, according to data from Ultumus, while the Lyxor MSCI Turkey UCITS ETF (TUR) and the Lyxor UCITS ETF PEA Turkey (DJ Turkey Titans 20) (ETUR), were also in the top 10 best performing European-listed ETFs.

Despite the strong performance, however, Erdogan said on Tuesday he will not back out from the arms deal with Russia. “We have made an agreement [with Russia]. We are determined. There is nothing like backtracking from that.”

Kathryn Wheelbarger, acting assistant secretary of defence for international security affairs, said last week the consequences of the Turkey-Russia would be “devastating” for Ankara’s joint F-35 fighter programme.

Turkey and emerging market debt

In a report released on Monday, Fitch Solutions predicted the Turkish economy would return to recession later this year, contracting 1.9% in 2019.

“Our core view remains that Turkey will muddle through its precarious external financing position by once again deleveraging and containing domestic credit growth,” Fitch said.

“However, risks to our outlook are heavily tilted to the downside over the coming quarters, given risks of another lira sell-off and the inflationary pressures and higher external borrowing costs that come with.”