FTSE closes lower as Turkish crisis continues

The FTSE gapped lower on the open, hitting a nadir of 7613 before a stronger start on Wall Street helped the UK index claw back some lost ground. Fears of contagion from Turkey’s precarious financial position have been weighing on European markets which are more exposed to Turkey than the US. As the Turkish Lira extended losses by 6.5%, investors found little comfort in moves by the Turkish central bank to shore up the currency by “providing all the liquidity that banks need”.

The banking sector on the FTSE and across Europe has been hardest hit particularly BBVA, BNP Paribas and Unicredit banks which have the greatest exposure to Turkish debt and loans. The big fear here is that Turkish corporates could default on their heavy foreign currency debt, resulting in a domino effect which could ultimately hit the banks hard. Right now, the problem remains localised, but if the Lira gets worse and the problem unravels further then the banks are in the firing line.

In addition to the banks, travel stocks with exposure to Turkey such as TUI, IAG and easyJet were also under pressure, as was Mondi, which has sizeable operations in Turkey.
After fears over Turkey dominated the European session, US stocks charged northwards as gains in tech stocks overshadowed the Turkish Lira crisis. Whilst the likes of Amazon and Apple moved higher, financials were on the back foot, like their European counterparts, over concerns of exposure to the Turkish Lira crisis.

Pound Steady Ahead of Wednesday’s Jobs Data
The pound has managed to remain flat versus the dollar, as the dollar bulls pause for breath. Whilst the pound hasn’t been able to capitalise on the dollar easing back from a one year high, it hasn’t dropped lower either.

Pound traders will now start to look towards earnings data due tomorrow. Average earnings in the three months to June are expected to have stagnated at 2.7%, which is unlikely to do the pound any favours or provide a solid distraction from growing concerns that a hard, no deal Brexit is becoming increasingly likely. A surprise to the upside could help trigger a relief bounce in the pound, before investors look towards inflation data on Wednesday. However, any weakness in wage growth could kick the pound lower versus the dollar and the yen, particularly if flows into these currencies continue to strengthen on risk aversion.

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