European stocks fall as Turkey fears heighten

By Julien Ponthus, Helen Reid, and Jonathan Cable

European shares slipped yesterday as investors licked their wounds after a tumultuous week, eyeing further turbulence in emerging markets and weakness in tech stocks.

The pan-European Stoxx 600 fell 0.1%, staying close to the six-week low it hit earlier in the week.

The index was down 1.3% on the week, its worst loss in seven weeks as the market reeled from a currency crisis in Turkey driving selling across emerging markets.

The Turkish lira fell back around 5%, having enjoyed a brief recovery, after a Turkish court rejected a US Christian pastor’s appeal for release, deepening a diplomatic rift between the countries and reigniting investors’ fears of a widespread emerging market crisis.

“The consequences for European economies [from Turkey] could be more severe from a geopolitical perspective,” wrote Goldman Sachs analysts, arguing that trade and financial links with the country were relatively small.

“To declare with confidence that the worst is over for the lira, the central bank would have to act decisively... diplomatic tension with the US would have to ease, and prudent fiscal measures and structural reforms would have to be swiftly implemented,” stated Rabobank analysts in a note.

Britain’s Ftse 100 saw its worst weekly loss in five months, with a 1.4% fall, and sterling set its worst weekly streak against the dollar since 2014.

Meanwhile, more evidence that eurozone growth has slowed this year is likely to be seen on Thursday, when surveys are expected to show an escalating global trade war is hurting producers.

The currency bloc was a surprise economic star last year, outpacing its peers, but the rate of expansion is steadily slowing and a succession of polls have said it has already peaked — although a recession is seen as unlikely.

Protectionist policies on trade are likely to tap the brakes significantly on global growth and have already caused turmoil in financial markets.

Manufacturers have been spooked by the escalating trade war between the US and its trading partners, although reports China is to send a delegation to Washington for discussions may allay some of those fears.

Thursday’s composite Purchasing Managers’ Index (PMI) for the eurozone, compiled by IHS Markit, will be the first gauge of the economy’s health in August.

A reading above 50 indicates expansion, and if the 54.3 forecast in a Reuters poll for a composite PMI is realised, it will confirm growth remains robust but is far weaker than the decade-high pace of earlier this year.

“European growth momentum is losing steam. (But) we only expect a small setback compared to last month, despite relatively weak European financial markets so far in August,” said Nordea economists.

Central bankers meet at the Federal Reserve’s annual retreat in Jackson Hole from Thursday and while the agenda has yet to be released, no big policy pronouncements are expected.

Trade war concerns are likely to feature heavily in discussions among the central bankers.

The world’s two largest economies — the US and China — are due to slap tariffs on billions of dollars of each other’s goods on Thursday, in addition to levies that took effect on July 6.

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