European stocks end sharply lower as Turkey contagion fears spook investors

European stocks closed sharply lower Friday as worries that problems in Turkey could infect other eurozone countries unsettled investors and sparked a tumble in equity indexes throughout the globe.

What are markets doing?

The Stoxx Europe 600 SXXP, -1.07%  finished down 1.1% to 385.86. With the move, the pan-European gauge booked a weekly decline of 0.9%, marking its largest weekly drop since June 29, according to Dow Jones Market Data. The decline also pushed the index about 0.9% lower for the year, thus far.

Germany’s DAX 30 DAX, -1.99% booked a 2% decline to 12,424.35, representing its largest daily decline since June 25. The index lost 1.5% for the week, marking its second straight such decline.

Meanwhile, France’s CAC 40 PX1, -1.59%  shed 1.6% to 5,414.68, marking its worst day since June 25. The French bourse recorded a weekly drop of 1.2%, its steepest weekly drop since late June. The U.K.’s FTSE 100 UKX, -0.97% meanwhile, stumbled 1% lower to close at 7,667.01, holding on to a slight weekly gain of 0.1%. The index has posted a weekly gain in four of the past five weeks.

Meanwhile, the FTSE MIB Italy index I945, -2.51% declined by 2.5% to 21,090.78. For the week, the gauge lost 2.3%, while Spain’s IBEX 35 IBEX, -1.56%  retreated by 1.6% to reach 9,602.10. The IBEX notched a weekly fall of 1.4%.

What’s driving the market?

The tumble for European stocks came 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. An address by Turkish President Recep Tayyip Erdogan appeared to worsen woes for the lira with a speech Friday.

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, +16.1477% 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 27% this week, bringing its year-to-date decline to more than 70%.

The euro EURUSD, -0.9891%  was down sharply against the dollar, with one buck changing hands at $1.1400 compared with $1.1526 late Thursday in New York, while the British pound GBPUSD, -0.4289% also took a hit against greenback. Sterling last bought $1.2759, 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 for International Settlements.”

“European shares lead global stock markets increasingly lower and Wall Street futures are far enough into the red to indicate no comeback by U.S. indices by cash open,” said Ken Odeluga, market analyst at City Index.

“Once again, investors show they perceive a too-strong dollar to be the key medium of harm from increasing trade restrictions and other geopolitical tensions. Anxiety from fresh U.S. sanctions on Russia rises as the ruble spirals lower still, whilst Turkey’s lira offers no solace after an alarming 10% downward spike to its latest nadir,” he said.

Stocks in focus

Weighing on the German index, shares of Deutsche Bank AG DB, -4.68% DBK, -4.60% tumbled over 5% after a downgrade to underweight by analysts at Morgan Stanley.

Shares of Spain’s BBVA SA BBVA, -5.16% BBVA, -6.02%  slumped 5.2%, Italy’s UniCredit SpA UCG, -4.73%  gave up 6% and France’s BNP Paribas SA BNP, -2.99%  shed 3%. The banks are among the biggest lenders to Turkey and have come under closer scrutiny by the Single Supervisory Mechanism, the ECB’s arm charged with monitoring the region’s banks, according the FT report.

Novozymes A/S NZYMB, -3.31% closed down 3.3% following the release of second-quarter results from the Danish biotech firm.

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