Turkish concerns dominate at the start of the week

Summary:

• EM currencies plunge as Lira keeps crashing

• DE30 in the red with Bayer down 10%

• Why European banks bleed along with TRY

• Gold falls near 18-month low despite risk-off flows

• US stock indices begin brightly

The Turkish currency remains in the spotlight as the new trading week is slowly unfolding. The TRY began the week with a gargantuan decline on late Sunday as it crashed above 7.2 per dollar following Erdogan’s speeches over the weekend and remarkably thin volatility conditions then. Other EM currencies have also taken a hit with the South African rand plummeting over 10% on late Sunday.

European indices have not begun the new week on the right foot as concerns regarding a possible spillover of Turkish difficulties are weighing on some particular stocks. Let us recall that the European financial watchdog on Friday singled out some European lenders as being particularly vulnerable to the currency crisis in Turkey (those having the largest relative exposure there). What has caused such a mighty decline of Bayer's shares? The tremendous sell-off seen this morning stems from the fact that Monsanto, the US agrochemical company being acquired by Bayer earlier this year, was hit with a significant punishment in the first trial over claims that the Roundup weed killer causes cancer.

The latest unprecedented drop in the Turkish lira valuation has drawn attention of the market participants as well as financial media. Financial Times issued a report on Friday that exerted quite a significant downward pressure on some of the European banks. Namely, the newspaper claimed that the European Central Bank is concerned about the exposure of BBVA (BBVA.ES), BNP Paribas (BNP.FR) and UniCredit (UCG.IT) to the Turkish market. Share prices of those banks took a dive as a consequence.

Given the recent plunge in not only the TRY but also other EM markets - the South African Rand dropped sharply by 10% during the Asian session - it is perhaps surprising that the US markets remain higher. Contagion has once more become a key buzzword, with the number of news articles mentioning “contagion” experiencing a huge spike higher on Friday. Gold in particular is a surprise given that the precious metal is often seen as the ultimate safe haven, but the market has actually fallen to its lowest level in almost 18 months in dipping below $1200/oz this morning.

The start of the US cash session has seen a bright start for stock indices, with the markets seemingly not too concerned despite the escalating situation in Turkey. The US500 dropped lower overnight during the Asian session falling back near its lowest level of the month at 2820, but there has been a pretty solid bounce since then. The low was made around 5AM but since then there’s been a 20 handle bounce and in doing so, the market moved above where it ended on Friday. It should be noted however that there has been some selling into the European close and the rest of the day’s trade may be keenly watched as it could well set the tone going forward.