JP Morgan moves Turkey to neutral from underweight

NEW YORK, July 29 (Reuters) - JP Morgan moved Turkey to a neutral from underweight position in its emerging market model bond portfolio and said it saw the likelihood of a "market friendly" court verdict bearing on the survival of the country's ruling AK Party.

In a report dated Monday, it gave no reason for the change to neutral from underweight, which would imply adding Turkish bonds to the trading portfolio of its Emerging Market Bond Index Global Index (EMBIG), a closely followed emerging markets benchmark.

But another section of the report said the bank saw a relief rally, if the ruling AK Party (AKP) remains intact after a Constitutional Court verdict it expected by the end of the week.

The Constitutional Court Monday began examining whether the AKP had engaged in Islamist activities and should be closed.

The court case is linked to a long-running power struggle between Turkey's secularist establishment and the Islamist-rooted AK Party, which are at odds over the direction of the officially secular but predominantly Muslim country.

For Turkish markets, the court case bears on political stability. Its potentially market-sensitive impact is seen dwarfing that of Sunday's deadly Istanbul bombings and Turkish fighter air attacks this week on Kurdish separatists in Iraq.

JP Morgan wrote: "We now attach an 80 percent likelihood of a market-friendly outcome to the case against AKP: 50 percent that the AKP remains intact and a 30 percent likelihood that the AKP is disbanded and (Prime Minister Tayyip) Erdogan is allowed to run as an independent in the general elections.

"If the AKP survives, there will surely be a relief rally. If the AKP is indeed closed and Erdogan is banned from membership in a political party ... we expect the market to react negatively at first because this would mean a rise in political uncertainty."

But even if the AKP is shut down, political stability is likely to be restored relatively fast, JP Morgan added.