Fear of contagion is back: European markets today

European stocks are among the least popular this year, despite the strong performance of U.S. equities: as BofA remarks, European stocks have had net fund outflows for the past 25 weeks.

We believe that this tendency will continue this week as well. Despite the optimistic tone of Michel Barnier and Dominic Raab, the real situation on Brexit is likely much more tense.

Today we also saw continued sell-offs of EM bonds. This sell-off also hit Italy, with the spread between BTPs and Bunds currently being the highest in 5 years after Fitch lowered their outlook on the Italian public finances.

USD/TRY jumped back to above 6,5. Given that today we are expecting inflation data from Turkey, we will likely see continued pressure and focus on the Turkish lira.

All of this collapsed the EUR/USD below 1,16. The fear of contagion from Turkey and other EMs spreading to Europe is back. Due to this we recommend short positions in European banks most exposed to EMs at the market open. These banks are: Unicredit, Intesa San Paolo, BNP Paribas and BBVA.

We also expect further pressure on the currencies of small, open European economies such as Sweden, Denmark and Hungary.

Technical picture: USD/HUF

Given that the price is currently below the median line of the bullish channel and that RSI has violated the bearish divergence, we believe long positions are justified at this level.

S/L: 277.5

Source: Bloomberg Finance L.P.

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

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