European shares take hits from near south and east

Summary

Volatility stoked by events in Turkey, sanctions on Russia and the latest envelope pushing in Italy, is a heady mix.

Dollar pressure

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. Pessimism is more broadly distributed on Friday. 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 rouble spirals lower still, whilst Turkey’s lira offers no solace after an alarming 10% downward spike to its latest nadir. This time, there should be little to no contagion from Russia’s banking sector to Continental Europe. Key links snapped by sanctions for the annexation of the Crimean Peninsula were not fixed. It’s timing, of course, that exacerbates the appearance of a more material potential hit on European lenders and markets more broadly.

Banks are the conduit

Reassurances are less possible regarding the read across from Turkey. Historic cross-holdings, particularly to German lenders, have been among the major points of stability in cohesion with Ankara as diplomatic ties deteriorate. Cue another weighty drop by Deutsche Bank, slides by Commerzbank and others. This draws the European STOXX bank sector down almost as much as the tariff-battered basic resources index. Financials also face resurgent yield pressure of the less advantageous kind from Italy.

‘Good cop/bad cop’ in Italy

The basic strategy of Italy’s coalition leaders is now clear. Ministers continue their gradualist (even compromising) approach towards Brussels (good cop) - Messrs. Di Maio and Salvini keep up the confrontational rhetoric on economic and budgetary matters (bad cop). 5-Star’s Di Maio took his turn on Friday, calling for the clause in Italy’s constitution obliging a balanced budget to “be cancelled”. Benchmark 10-year BTP yields jumped again before easing a little. It is persistent upward pressure on BTP yields that widens the spread to bunds and adds to pressure on the euro. The single currency is below $1.15 for the first time since July 2017, with the weakest notch at $1.143. That was just above late June 2017 failure highs. It’s difficult to read euro’s reluctance to step below these lines as much more than profit taking.

U.S. inflation next

As the dollar arcs to fresh 13-month peaks seemingly by the hour—sterling offered the latest after June UK GDP missed—dragging on gold, oil and other commodities, the intensity of the advance raises big questions for investors about global growth. With U.S. inflation readings still ahead—and the highest probability of a significant beat this week—resumed dollar angst has further to run, on Friday at least.