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Global Stocks Drop Amid Concerns About Turkey

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08/10/2018 | 07:09am EDT

By Ben St. Clair

Global stocks fell, the euro declined and investors moved into the dollar Friday amid fears that ongoing financial instability in Turkey will impact other markets.

The euro was down 0.5% to $1.1463 and the dollar hit a one-year high as investors looked for safe assets, before falling slightly. The WSJ Dollar Index was up 0.5%.

The Stoxx Europe 600 fell 0.8% in morning trade, following Asian markets lower. Futures pointed a 0.4% opening fall for the S&P 500.

The markets moves followed a Financial Times report that the European Central Bank is examining the Turkish exposure of several European banks.

The ECB's banking watchdog is monitoring the situation in Turkey and is in contact with eurozone banks about their individual exposures to the country with a view to calculating overall repercussions for the banking sector, a person familiar with the matter said. While the ECB's concern isn't too high at this point, the central bank is monitoring how the weakening Turkish lira, and the country's economy, could potentially hurt eurozone banks.

The lira fell by over 10% at one point and was down 6.5% in morning European trading Friday. That brings its losses to 14.4% on the week after the U.S. imposed sanctions and investors fretted about the health of the country's financial system.

The Stoxx Europe banking sector dropped 1.3% on concerns about lenders' exposure to debts in Turkey. Among banks with large exposure to the country, shares of Spain's BBVA were down 3%, Italy's UniCredit was down 3% and France's BNP Paribas was down 3.4%.

As markets fell, analysts and investors debated just how far concerns over Turkey could spread at a time when there are concerns about the effect of a rising dollar on emerging markets and a potential trade war between the U.S. and China.

Still, the level of overall exposure of European banks to Turkey remains limited, according to Carsten Hesse, European economist for Barenberg Bank. "That the fallout from Turkey could cause any credit crunch in any part of the eurozone seems highly unlikely," Mr. Hesse wrote in a note Friday.

Mr. Hesse said that even if eurozone goods exports to Turkey were to fall by around 20% this would subtract no more than 0.1 percentage point from growth in the currency bloc.

Investors have been concerned that President Recep Tayyip Erdogan is threatening the independence of the Turkey's central bank. The central bank left interest rates unchanged last month, and "many investors believe that political pressure is keeping the central bank from taking the necessary steps," wrote Commerzbank Chief Economist Jörg Krämer in a note Friday.

Many investors have shied away from emerging markets this year as a rising dollar and U.S. interest rates make greenback-denominated debt more expensive to pay back and refinance. Strong U.S. corporate earnings and positive economic data have also given investors fewer reasons to invest in riskier markets.

"I don't see that market backdrop changing terribly quickly," said Neil Veitch, global investment director at SVM Asset Management.

Asian markets were mostly lower, as Hong Kong's Hang Seng fell 0.8% and South Korea's Kospi shed 0.9%.

Japan's Nikkei dropped 1.3%. The move came as the country returned to solid growth in the April-June quarter, a trend economists said was likely to continue on the back of higher wages and consumer spending unless trade conflicts with the U.S. worsen.

The world's third-largest economy expanded at an annualized pace of 1.9% in the second quarter of 2018 after a revised 0.9% contraction in the first quarter, which ended the longest stretch of growth in 28 years.

Meanwhile, the Shanghai Composite Index edged slightly higher, ending a week in which Chinese stocks have seesawed amid escalating trade concerns between the U.S. and China.

Elsewhere, yields on 10-year U.S. Treasurys fell 2.896% from 2.935% Thursday. Yields fall as prices rise.

In commodities, Brent crude was down 0.1% to $72 a barrel and gold was down 0.2% to $1,217.50 an ounce.

Mike Bird, Tom Fairless and Megumi Fujikawa contributed to this article.

Stocks mentioned in the article
ChangeLast1st jan.
CHINA-SHANGHAI COMP -0.01% 3090.64 End-of-day quote.23.73%
DJ INDUSTRIAL -0.55% 25745.67 Delayed Quote.10.37%
HANG SENG -0.25% 29354.38 Real-time Quote.13.58%
KOSPI COMPOSITE INDEX -0.17% 2172.68 Real-time Quote.6.43%
NASDAQ 100 0.43% 7380.75372 Delayed Quote.16.10%
NASDAQ COMP. 0.07% 7728.968235 Delayed Quote.16.41%
NIKKEI 225 0.20% 21608.92 Real-time Quote.7.75%
S&P 500 -0.29% 2824.23 Delayed Quote.12.66%
US DOLLAR INDEX 0.07% 96.45 End-of-day quote.-0.24%
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