Europe close: Basic Resources stocks buried under amid EM weakness
Stocks slumped on Wednesday, finishing near their lows of the session, weighed down by a slump in Basic Resource stocks, as investors wondered aloud whether the mayhem in Turkish asset prices would have a knock-on effect on other emerging market economies.
Traders were also digesting another down day for the Chinese yuan following a spate of weak readings on that economy from the previous session.
"We are being treated to a mid-summer 'sea of red' in equities, as the morning's drift lower turns into a full-blown rout. The stronger dollar has hobbled commodity prices," said IG's Chris Beauchamp.
"[...] While already crowded, it looks like a few more people have joined the long-dollar trade, as emerging market jitters encourage more funds into the US currency, seen as a safe haven from both the Turkey crisis and trade wars."
Indeed, Indonesia's central bank surprised traders on Wednesday, raising its main policy rate by 25 basis points to 5.50%, in part to compensate for recent weakness in its own currency, the rupiah.
Against that backdrop, the benchmark Stoxx 600 lost 1.36% or 5.22 points to 379.70, alongside a decline of 1.58% or 195.86 points to 12,163.01 for the German Dax and a fall of 1.82% or 98.19 points to 5,305.22 on the French Cac-40.
In parallel, euro/dollar was nearly flat at 1.1346, alongside a 0.10% advance for the US dollar spot index to 96.8280 - a 13-month high.
Dollar strength undermined base metals' prices on the LME, with three-month copper futures retreating to $5,801 per metric tonne after starting the day at $6,039, which in turn drove the Stoxx 600 sector gauge for Basic Resources companies down by 4.15% or 18.54 points to 427.95.
The US dollar was especially strong against certain emerging market currencies, like the South African rand, and was last up 2.01% to 14.5347 rand, triggering continued talk in markets regarding the risk of dislocations as America's central bank continues to tighten policy.
Against that backdrop, Turkey was still in the spotlight, after its central bank moved to limit banks' ability to 'short' its currency and Ankara slapped tariffs ranging from 50% to 140% on various US-made goods.
The former saw the Greenback slip by 4.89% to 6.0394 against the lira.
However, any boost to sentiment was being offset by the dollar's gains versus the Chinese yuan of 0.74% to 6.9348.
Commenting on events overnight in Turkey, Michael Hewson at CMC Markets UK said: "Turkish President Erdogan appears to be playing a dangerous game if he thinks he can come out on top in this spat with the US.
"Notwithstanding the fact that tariffs are always inflationary they will only increase the concerns of Turkish business who want the central bank to start getting to grips with the runaway inflation in the Turkish economy. They will also increase the downward pressure on the lira, in turn causing greater pain to those Turkish corporates who have currency denominated loans."
No major economic reports were scheduled for release in the Eurozone on Wednesday, with investors brushing-off largely in-line readings on US retail sales and industrial production for July.