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Global Stocks Drop as Plunge in Turkish Lira Rattles Markets

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08/10/2018 | 10:21am CET

By Ben St. Clair

Global stocks fell Friday, the euro declined and investors moved into the dollar 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 DXY dollar index stood 0.5% higher Friday.

The Stoxx Europe 600 fell 0.5% in early trade, following losses in Asian equity markets.

The markets moves followed a Financial Times report that the European Central Bank is examining the Turkish exposure of several European banks, including Spain's BBVA, Italy's UniCredit and France's BNP Paribas.

The Turkish lira fell by over 10% at one point and was down 5.5% in early European trading Friday. That brings its losses to 13.3% 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 1.2% on concerns about lenders' exposure to debts in Turkey.

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," 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 country'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.

Asian markets were mostly lower, as Hong Kong's Hang Seng 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 2.894% from 2.935% Thursday. Yields fall as prices rise.

In commodities, Brent crude was down 0.7% to $71.56 a barrel and gold was down 0.3% to $1,215.60 an ounce.

Mike Bird and Megumi Fujikawa contributed to this article.

Write to Ben St. Clair at ben.stclair@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
CHINA-SHANGHAI COMP -1.53% 2593.74 End-of-day quote.-21.73%
HANG SENG 0.15% 26116.69 Real-time Quote.-12.89%
KOSPI COMPOSITE INDEX 0.29% 2073.8 Real-time Quote.-15.98%
NIKKEI 225 0.62% 21506.88 Real-time Quote.-6.11%
US DOLLAR INDEX 0.39% 97.44 End-of-day quote.6.08%
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