Europe Markets: European stocks tumble as ECB raises questions about Turkey contagion

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European stocks got knocked sharply lower on Friday as worries about spillover effects from an escalating financial crisis in Turkey knocked eurozone currencies and equity bourses sharply lower.

What are markets doing?

The Stoxx Europe 600 SXXP, -0.83%   was down 0.7% to 387.30, after finishing Thursday’s session with a 0.1% gain. With the move, the pan-European gauge is now on pace for a weekly slide. It’s trading down about 0.5% for the week, pushing the benchmark back into negative territory for the year.

Germany’s DAX 30 DAX, -1.60%  traded 1.3% lower at 12,509.77, after booking a 0.3% gain to 12,676.11 Thursday, with the Germany index set for 0.9% weekly decline. Meanwhile, France’s CAC 40 PX1, -1.13%  fell by 1% at 5,447.78, after ending the previous session little changed at 5,502.25. The French equity benchmark is set for a weekly fall of about 0.6%. The U.K.’s FTSE 100 UKX, -0.64%  slid 0.5% to 7,702.86, after falling by a similar amount on Thursday, but is clinging to a 0.6% weekly return.

Meanwhile, the FTSE MIB Italy index I945, -1.36%   declined by 1.3% to 21,349.93 , after declining by 0.7% on Thursday. For the week, the gauge is on track for a 1.1% fall, while Spain’s IBEX 35 IBEX, -1.01%  retreated by 1.2% at 9,641.60, after falling by 0.8% the day before. The IBEX also is on pace for a 1.1% decline.

The euro EURUSD, -0.5293%   edged down 0.5% to $1.1553, compared with $1.1610 late Thursday in New York. The British pound GBPUSD, -0.3977%  slumped 0.5% to $1.2756.

What’s driving the market?

The tumble for European stocks comes after a report from the Financial Times (paywall) said that the European Central Bank has grown increasingly concerned about potential contagion from Turkey’s problems, especially in the banking sector.

The news sparked a risk-off atmosphere in EU markets, with Germany, the largest member of the EU, seeing its stock benchmark among the more severe declines, and southern European countries, Spain and Italy, viewed as among the smaller and more vulnerable to eurozone worries, sliding sharply as well.

The lira USDTRY, +6.7640% which has been consistently hovering around an all-time low against the U.S. dollar this summer, fell to a fresh nadir and European currencies were also dealt a blow as investors rush into U.S. dollars.

According to FactSet data, Turkey’s lira is down 13.3% this week, bringing its year-to-date decline to more than 35%.

The euro EURUSD, -0.5293%  was down sharply against the dollar, with one buck changing hands at $1.1453 compared with $1.1526 late Thursday in New York, while the British pound GBPUSD, -0.3977% also took a hit against greenback. Sterling last bought $1.2758, versus $1.2824 Thursday.

What are strategists saying?

“For some time now investors have been looking at the unfolding currency crisis in Turkey as a local difficulty, however the accelerating speed of the declines appears to be raising concerns about European banks exposure to the Turkish banking system,” said Michael Hewson, chief market analyst at CMC Markets UK.

There are “reports that the European Central Bank is concerned that some banks in France, Italy and Spain may not be fully hedged against the precipitous falls in the Turkish Lira through their exposure to the Turkish banking system, has seen the euro fall sharply,” Hewson said. “If these Turkish banks start defaulting on their foreign currency loans to these banks in Europe, with Spain’s banks reportedly having the largest exposure, according to the Bank of International Settlements.”

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