The European markets most exposed to a sell-off

This year's behavior of European markets resembles that of a developing country rather than a developed Western economy. That is why we think that any deepening of the crisis in emerging markets will drag Europe with it. There are  two reasons. On one side, the risks surrounding Brexit, the lack of a plan for immigration, conflicts between Brussels' bureaucracy and Italy, Hungary and Poland, combined with Russia's attempts to move Eastern Europe out of the EU's sphere of influence, create a risky political atmosphere. From a financial point of view, many of the major European companies are strongly exposed to emerging markets in Asia and the Middle East.

These are the risks to the economies of European countries.

Great Britain

The risks of Brexit have calmed down in recent weeks after Michel Barnier and Angela Merkel assured the markets that compromises would be made for future EU-UK cooperation. At the same time, however, Brexit's uncertainties remain: lack of a solution to the Irish border, for instance. With the deepening financial crisis in emerging markets, these factors are likely to exacerbate the sale of pounds and UK stocks. In addition, Britain is the European country with the largest financial deficit (public + private), about 5%:

However, in the longer term, we are optimistic about the pound and the UK stocks and we are monitoring the signal markets to suggest a change in investor sentiment:

"Buy" UKX: Fibonacci model "5-0" gives UK bulls support

GBP/USD: Factors we will be tracking for sentiment reversal

Citi: UK stocks are at their historic bottom since World War II

Sweden

The elections in Sweden on 9 September (Monday) are key to Europe: the leading parties in the elections are the Social Democrats, an anti-immigrant and anti-EU partiy, which will likely put Sweden and the EU in conflict. We expect SEK to depreciate before and after the election, especially since the Riksbank decided to slow down interest rates, citing political risks and a lack of appreciation in inflation.

This is not necessarily bad for the Swedish markets. The Swedish economy has been among the strongest in Europe since the crisis, and as an exporter the weak Swedish krona will support local companies. We believe low interest rates will support the strong performance of Swedish banks, especially those with larger international operations such as SEB Group and Swedbank.

Italy

This is probably the most significant risk for the European Union. Negotiations for the Italian budget will continue until September 27. In recent days, Mateo Salvini has been trying to reassure the markets that the Italian budget deficit will not exceed the 3% set aside by the European Commission.

The factors we are going to follow about Italy are discussed here: What do Italian BTPs tell us about EUR / USD

To a large extent, investors are already fleeing risky European assets. Last week, investors pulled more than $ 100 million from risky European bonds and added $ 238 million in US bonded bonds.

This is despite the fact that the foundations of European companies are more positive than the foundations of US companies, according to JP Morgan Asset Management and others.

Source: Bloomberg Finance L.P.

Charts: Used with permission of Bloomberg Finance L.P.

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