European stock markets have been rocked by the plunge in the Turkish lira. 

Europe

The European Central Bank (ECB) warned that a number of eurozone banks might be exposed to the sharp decline in the Turkish lira.

A number of Spanish, French and Italian banks are connected to Turkey in the form of foreign denominated loans, and if the Turkish borrowers haven’t hedged their exposure it might spark defaults. Should European banks incur write-downs on account of the Turkish currency crisis, investment sentiment is likely to be weak. Many financial institutions in Europe have their own non-performing loans to contend with, and they could be facing a similar situation in Turkey. 

Ryanair shares are in the red after more industrial disputes led to nearly 400 flights being cancelled today. The airline’s reputation is suffering as prospective customers could be deterred from flying with the company as the cancellation risk is a factor. A number of years ago Ryanair made a major effort to ramp up customer service levels, and it worked. The share price hit a record-high last summer, but since then, a series a flight cancellations has hurt the share price. It was reported, that pilots will re-start talks with management to try and resolve the issue on Monday, and investors will be monitoring the situation. The stock has been in a downtrend since August 2017, and if the bearish move continues it could target 1,250p.

The US-dollar is on the rise as traders seek safe-haven assets, and this has hurt silver, and Fresnillo shares are in the red on the back of this. High grade copper has taken a knock, and the trade spat between China and the US is playing into that too. Miners like BHP Billiton and Rio Tinto are lower today as a result of the softer metal prices.

Evraz, the steel manufacturer that has exposure to Russia and a few of its neighbours, has been hit after the US imposed sanctions on Russia for its alleged involvement in the poisoning of a former Russian spy in the UK. Evraz has a track record of taking a hit whenever the West punishes Russia.         

US

The negative sentiment in Europe has spilled over to the US. The Turkish situation was made worse by President Tump’s decision to double the tariffs imposed on steel and aluminium imported from Turkey. This is going to be much more of a problem for Turkey that it is for the US. Nonetheless, it adds to the negative geopolitical picture.

US inflation on an annual basis held steady at 2.9% in July, while economists were expecting it to reach 3%. The core figure rose to 2.4% from 2.3% and this underlines the real increase in demand.    

FX

The US dollar index has hit a one-year high as traders scramble for a safe-haven assets. The enormous dive in the Turkish lira has put pressure on the euro, and in turn driven up the greenback. The firm US inflation figures, and in particular the core reading added to the upward move in the US dollar.

EUR/USD has dropped to a one-year low given the eurozone’s exposure to Turkey. The ECB warned a number of European banks could have exospore to Turkey in the form of loans, and that is weighing on the single currency. Now that the euro has dropped below the 1.1500 area, we could see further losses.

GBP/USD has dropped to its lowest level since June 2017 as the US dollar drives higher. The UK economy grew by 0.4% in the second-quarter – in line with forecasts – and it was an improvement on the 0.2% growth in the first three months. If the bearish move continues it could target 1.2590.     

Commodities

Gold has crept higher despite the rally in the greenback. Recently, there has been a strong inverse relationship between gold and the US dollar, but not today. The push higher in gold despite the pop in the greenback underlines how risk-off investors are. The metal remains in its wider negative trend, and $1,220 might act as resistance.

WTI and Brent crude oil have rallied as renewed fears about sanctions on Iran has prompted buying. It is worth noting that oil has been weak recently and bargain hunters have swooped in. The energy market may be a bit firmer today but WTI has been broadly losing ground since June, and Brent crude has been moving lower since May.    

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