European Stocks Drop as Traders Rush Out of Banks on Turkey Risk

(Bloomberg) -- European stocks extended their losses on Friday afternoon as the meltdown in the Turkish lira spurred concerns about an economic crisis that could spread to other emerging markets and rattle the European banking sector.

The Stoxx Europe 600 Index retreated as much as 1.2 percent, the most in a month, on track to post a weekly loss of 0.9 percent. Technical charts showed the benchmark broke below both its 50- and 200-day moving averages, sending a bearish signal. BBVA fell 5.3 percent, UniCredit dropped 5.2 percent and BNP Paribas sank 4.1 percent.

“The current episode is a classic sign of risk aversion - shoot first and ask questions afterwards,” said Andrew Milligan, head of global strategy at Aberdeen Standard Investments. “In an investing environment where ETFs and passive funds are important for cross-border flows, so it is understandable to see the euro, European stocks and European bank shares prices all come under pressure.”

The Financial Times reported that the European Central Bank is said to be concerned about the three lenders’ exposure to Turkey. According to Bloomberg Intelligence, the key concern is the more than $130 billion exposure of European lenders to the Turkish non-bank private sector. Banking shares extended declines after U.S. President Donald Trump said he authorized doubling some metals tariffs on Turkey.

Today’s selloff worsens the already negative performance of European banking shares this year, which are down 13 percent in 2018 amid disappointment the ECB will keep rates on hold until at least next summer. Investors continue to shun the region’s stocks, with European equity funds seeing outflows of $0.6 billion in the latest week, marking a 22nd straight week of redemptions, according to Bank of America Merrill Lynch strategists.

“As we have seen during the Greek debt crisis, financial markets are sufficiently interwoven that concerns over debt serviceability in one region can spread quite quickly within European banks, adding uncertainty to a sector that has already become less popular with investors as they struggle to see the ECB meaningfully raise rates this economic cycle,” said Edward Park, a London-based investment director at Brooks Macdonald.

Italy’s UniCredit said it’s been “paying particular attention” to geopolitical risks in Turkey, where the tumbling lira is driving down the value of its local banking venture. UniCredit jointly controls Turkey’s Yapi Kredi Bankasi AS, part of a banking empire that sprawls over 14 countries, serving 25 million clients.

Investors this week turned against emerging markets as the rising prospect of a prolonged trade war compounds a backdrop characterized by a more hawkish Federal Reserve and ECB. Russia’s ruble sank to a July 2016 low following new U.S. sanctions and the South African rand weakened to a November 2017 low.

U.S. equities have been the big exception to the regional outflows, seeing inflows of $4.6 billion in the latest week, while emerging-market stock funds lost $0.6 billion, according to BofA citing EPFR.

To contact the reporter on this story: Ksenia Galouchko in Moscow at kgalouchko1@bloomberg.net

To contact the editor responsible for this story: Blaise Robinson at brobinson58@bloomberg.net

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