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Euro stocks bear brunt of Turkish economic woes

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Euro stocks bear brunt of Turkish economic woes

SNL Image

? Lira plunges nearly 12%, bringing other emerging-market assets under pressure.

? European stocks open sharply down.

? Exposure to Turkey drags UniCredit, BNP and BBVA down.

? Wall Street due to open lower.

European shares posted sharp losses amid concerns that Turkey's currency crisis will affect the eurozone. The lira plunged nearly 12% during the morning of Aug. 10.

Turkey President Recep Tayyip Erdogan is due to make a speech later in the day, with markets looking for signs of any easing in the diplomatic rift with the U.S. over the detention in Turkey of an American pastor on suspicion of aiding terrorists. The Turkish government may unveil a new economic model later in the day.

The Turkish lira sank more than 7% against the dollar as of 7:07 a.m. ET.

The European Central Bank is reportedly concerned that some Italian, Spanish and French banks may not be fully hedged against the lira's fall. The potential high-risk exposure has helped spur the euro fall 0.50% versus the dollar.

Shares of Italy's UniCredit SpA, France's BNP Paribas SA and Spain's Banco Bilbao Vizcaya Argentaria SA were down by more than 3% each.

Given European banks' high nonperforming loans, "the last thing Europe needs is another tranche of potentially bad loans to add to the mix, at a time when the Italian government is already adopting a much more confrontational tone with the EU," wrote Michael Hewson, chief market analyst of CMC Markets UK.

"We are cautious, however, and want to see how the dust settles," TD Securities said in a note to investors. "It is important to differentiate the ECB's monetary policy mandate from its supervisory functions."

The Euro Stoxx 50 fell 1.33%, the FTSE 100 0.70% and Germany's DAX index 1.53% just before 7 a.m. ET. In Asia, the Shanghai Composite was little changed while the Hong Kong's Hang Seng Index fell 0.88%.

The U.S. dollar gained nearly 0.40% against sterling at around 7 a.m. ET. Fresh figures show that the British economy grew 0.4% in the second quarter, though the underlying trend in real GDP shows slowing growth. The dollar slipped 0.14% against the yen, as Japan's economy grew faster than expected in the second quarter due to a rise in private consumption

As the lira declined, other emerging market currencies were dragged lower. The Mexican peso shed 1.20% versus the U.S. dollar and the South African rand depreciated 1.27%.

U.S. bonds gained as 10-year yields dropped more than 3 basis points to 2.894% ahead of the U.S. inflation data. "It's interesting to see U.S. Treasury yields holding up fairly well despite the market turmoil that we are seeing in the [emerging-market] world," ING Research noted. "This may not last if things were to get worse — not least as no major upside surprise in U.S. CPI inflation will cause investors to start rethinking a more hawkish Fed."

The spread between the two- and 10-year Treasury yields is at around 26 basis points, compared to 51 basis points at the start of 2018.

"When the economy is expected to do poorly, investors prefer to lock in safe returns, which pushes long-term yields down relative to short-term yields, causing the curve to flatten and eventually invert," Jonas Goltermann, developed market economist at ING Research, wrote.

"If the Fed sees inversion as a reliable precursor of weaker growth, especially if it coincides with other signs of slowing growth, then an inverted curve could lead to slower hikes, or even a pause."

Brent crude oil jumped 0.42% to $72.37 on the ICE Futures Exchange, while gold fell 0.18% to $1,217.70 per ounce.

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The day ahead:

8:30 a.m. ET — U.S. CPI (Econoday consensus: 0.2% monthly, 2.9% yearly)

8:30 a.m. ET — Canada labor force survey (Econoday consensus: 19,000 employment, 5.9% unemployment)

1 p.m. ET — U.S. Baker-Hughes rig count

2 p.m. ET — U.S. Treasury budget (Econoday consensus: $73.5 billion deficit)