How far can European banks fall in front of the recession ghost?
Main U.S. indexes pare losses; Nasdaq now off ~2.5%
All S&P 500 sectors red; Energy weakest group
Euro STOXX 600 index down ~2.25%
Dollar, crude down; gold off >1%; bitcoin slides ~8%
U.S. 10-Year Treasury yield ~flat at ~3.80%
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HOW FAR CAN EUROPEAN BANKS FALL IN FRONT OF THE RECESSION GHOST?
Following a solid rally in the first half of 2024, European banks lost almost two-thirds of their gains in just three days as weaker U.S. economic data increased fears of a global hard landing.
After the slump in U.S. payrolls and the jump in unemployment to near a three-year high of 4.3% in July, the spectre of recession has come back to scare traders, which are now fully pricing in a Federal Reserve cut of at least 50 basis points in September, according to the CME Group's FedWatch Tool.
That was seen as only having 11% odds a week ago.
Joshua Mahony, chief market analyst at Scope Markets, pointed out that the prospect of a sharp collapse in interest rates does lower margins for the banks, while economic concerns will also likely dampen demand for loans and financial products.
"Investors are viewing European banks as an area that will feel the pinch should we see the banks slash rates in anticipation of a potential U.S. recession," he added.
However, the recent selloff has to be put into the context of a strong set of second quarter results as 80% of lenders reported higher than consensus forecast income with lower impairment pointing to a "strong credit quality," UBS analysts said.
But facing the economic uncertainty brought on by the recent data, how far can banks fall?
"European banks do remain highly geared to rates, but the build out of structural hedges has alleviated some of the earnings sensitivity," said Citi analyst Andrew Coombs, who suggested that the recent move is already "overblown."
Furthermore, Dutch ING INGA.AS said recently that as interest rates come down at a gradual pace that is good for banks as people can borrow more and invest more, supporting the economy.
Citi believes that European banks earnings per share is likely to decline by around 1% for every 25 basis points cut.
(Matteo Allievi)
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FOR MONDAY'S EARLIER LIVE MARKETS POSTS:
MAGNIFICENT SEVEN EYE OVER $700 BILLION IN LOSSES AMID GLOBAL SELL-OFF - CLICK HERE
U.S. STOCKS SWOON AS RECESSION FEARS RAMP - CLICK HERE
U.S. STOCKS POISED TO PLUNGE, NASDAQ TO BEAR THE BRUNT - CLICK HERE
POSITIONING FOR WHEN BAD NEWS IS BAD NEWS - CLICK HERE
YEN'S RAPID SURGE HAS ALARM BELLS RINGING - CLICK HERE
"HAVE WE GONE TOO FAR, TOO FAST?" - CLICK HERE
EUROPEAN SHARES BATTERED IN GLOBAL SELL-OFF - CLICK HERE
STOCK MARKETS IN FREEFALL AS EUROPE GETS UNDERWAY - CLICK HERE
BATHED IN A SEA OF RED - CLICK HERE
STOXX Europe Banks Performance YTD https://tmsnrt.rs/3SBheos
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