The lira firmed, touching 5.697 to the dollar, its highest in more than two weeks, after the opposition Republican People's Party won Sunday's repeat mayoral vote, dealing a major blow to the AKP.
Dollar-denominated bonds issued by Turkey's government rose across the curve, while the main stocks benchmark jumped 1.6%, helped by a rally in banking shares.
"This is undoubtedly good news for the lira and rates. USDTRY is already 1.8% lower and we can easily see it extending the correction further," Cristian Maggio, head of emerging markets strategy at TD Securities in London, wrote in a note.
"However, the AKP and Erdogan still have a few aces up their sleeves and we warn against excessive enthusiasm."
The news helped reverse some of the lira's sharp declines this year. Investor concerns about the outcome of the election, potential delays in broader economic reforms and strained ties between Ankara and Washington have put the lira among the worst performing emerging currencies this year.
Central bank data meanwhile showed business confidence among Turkish manufacturers rose to 102.5 points in June compared to 98.9 points in May.
Developing world markets have been buoyed in the past week by signs major central banks would tilt towards monetary policy loosening to spur global growth, hit by trade wars. The MSCI's index of emerging currencies posted its biggest weekly rise in two years on Friday after the U.S. Federal Reserve last week signalled interest rate cuts this year.
The main focus this week is a G20 meeting at which U.S. and Chinese leaders are expected to hold trade talks, with investors watching for any signs of a de-escalation in their trade war.
The more positive mood helped the South African rand stretch gains to a second day, while the Russian rouble traded near 10-month highs as the prospect of "significant" U.S. sanctions on Iran supported oil prices. Brent crude oil, a global benchmark for the country's main export, rose 0.8%.
Sri Lanka launched a sale of five-year and 10-year sovereign bonds, a senior government official told Reuters, its second international debt issue in three months. The government is seeking funds to repay debt after deadly bomb attacks last month.
Emerging stock markets made tepid moves, with Chinese stocks ending slightly higher on hopes on signs of thaw in the Sino-U.S. trade negotiations.
Russian stocks also gained, helped by shares of Gazprom. The gas giant said on Friday it completed its borrowing programme for 2019, but did not rule out issuing Eurobonds in euros, Swiss francs or yen at the end of the year.