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Banks Drag Europe ETFs Down on Turkey Uncertainty

This article was originally published on ETFTrends.com.

European stocks and region-related exchange traded funds continued to weaken Friday, with bank dragging down the market, as traders worried about the potential ripple effect of Turkish lira meltdown.

The iShares MSCI Europe Financials ETF (EUFN) , which provides a targeted play on European financial companies, decreased 3.0% and broke below its short-term support at the 50-day simple moving average on Friday.

The Vanguard FTSE Europe ETF (VGK) , the largest Europe-related ETF on the market, declined 2.3% and also broke below its 50-day average. Financials make the the largest portion of VGK's portfolio at 19.9% of underlying holdings.

European banks could be exposed to the losses

While Turkey's problems should not be a major problem for global financial markets, some were concerned that European banks could be exposed to the losses.

“The current episode is a classic sign of risk aversion - shoot first and ask questions afterwards,” Andrew Milligan, head of global strategy at Aberdeen Standard Investments, told Bloomberg. “In an investing environment where ETFs and passive funds are important for cross-border flows, so it is understandable to see the euro, European stocks and European bank shares prices all come under pressure.”

Related: 3 Investment-Grade Bond ETFs Tick Higher as Turkish Lira Dives

Specifically, the European Central Bank warned about three lenders' exposure to Turkey, including more than $130 billion exposure of European lenders to the Turkish non-bank private sector.

“As we have seen during the Greek debt crisis, financial markets are sufficiently interwoven that concerns over debt serviceability in one region can spread quite quickly within European banks, adding uncertainty to a sector that has already become less popular with investors as they struggle to see the ECB meaningfully raise rates this economic cycle,” Edward Park, an investment director at Brooks Macdonald, told Bloomberg

The global selling followed President Donald Trump's plans to double some metal tariffs on Turkey.

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