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European Stocks Suffer Worst Month Since February As Perfect Storm Of EM Contagion, Italy Jitters Comes Calling

"In September, markets will need to navigate news flow."

Well, European shares closed out August on a decidedly sour note thanks in no small part to renewed trade tensions with the U.S. after Donald Trump told Bloomberg that the bloc’s offer to “go to zero” on auto tariffs “isn’t good enough.”

The Stoxx 600 Automobiles & Parts Index dove 1.5% Friday on the news. The broad Stoxx 600 had its worst month since August after falling 0.8% to close the week.

Stoxx

Banks were the laggard on the month, diving on worries about exposure to the debacle in Turkey. Reports that the ECB is concerned about BNP, UniCredit and BBVA collided with jitters about Italy’s fiscal situation to weigh heavily on sentiment in a sector that was already suffering.

StoxxBanks

Here’s a useful visual on European bank exposure to Turkey’s economic meltdown:

BanksEuropeTurkey

(Goldman)

CDS spreads for BNP, BBVA and UniCredit have not entirely retraced recent widening. In fact, the cost of protection for UniCredit is still sitting near the May wides.

CDS

(Bloomberg)

Next month will be important for Europe as the stage is set for a budget clash between Italy’s populists and Brussels. Things turned more contentious in recent days amid yet another bitter immigration dispute.

Read more on European banks’ exposure to Turkey

To Spillover Or Not To Spillover, That’s The Question

There’s Only One Kind Of Umbrella For This Perfect Storm

Italy is reportedly mulling a request for a BTP-specific ECB program designed to protect the nation’s debt from speculation, an absurdly ironic ask considering the political environment.

If you ask UBS, September could be arduous. On Friday, the bank cut their year-end Stoxx 600 target to 400 from 440 citing an increased correlation between the index and EM. Nearly a third of European revenues come from emerging markets.

“In September, markets will need to navigate news flow on trade wars, the Italian budget and Brexit moving towards the endgame”, the bank writes.

Then again, that new year-end target still implies some decent upside – we’re talking about equity analysts after all.

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