What is going on with the European bank stocks? As you may know, the leading European banks stocks are now trading below their 2009 lows. This is not a healthy sign for stock markets around the world. Leading financial stocks such as Deutsche Bank AG (NYSE:DB), Credit Suisse Group AG (NYSE:CS), Banco Santander, S.A.(NYSE:SAN), and UBS Group AG (NYSE:UBS) are just a handful of stocks that remain under steady selling pressure nearly everyday. The talk of negative interest rates seems to add to the weakness in these stocks. Then the flattening yield curve is also something that is very negative for these stocks. The derivative markets are rarely talked about these days, but they are possibly the biggest problem with all of the global financial stocks.
These problems in the European bank stocks are now spilling over to the U.S. banks. Leading U.S. financial stocks have been plunging recently. Just look at a chart of JPMorgan Chase & Co. (NYSE:JPM), Bank of America Corporation (NYSE:BAC), Citigroup Inc. (NYSE:C), and Wells Fargo & Company (NYSE:WFC) and you will see how quickly these stocks have fallen since December 2015. Despite the decline in the large bank stocks the Federal Reserve (U.S. central bank) continues to stand firm that the economy remains fairly strong. Has the Federal Reserve ever gotten a crisis correct?
This time around there are financial problems in China, Japan, and Europe. All of these enormous economies are printing money in one form or another. Yet, the major stock market indexes are all plunging lower. This problem is not going to be easily fixed by the central bankers anytime soon, so stay on guard as 2016 is going to be a very volatile year. Traders and investors should continue to watch the leading European financial stocks for clues to the future action in the markets.
Every analyst and their mother are screaming about a continued massive collapse in the stock market. The fear is palpable, it tastes like onion and garlic. Billions of Dollars are being pulled from hedge funds and mutual funds on a monthly basis. There is significant fear at every turn. While this is true, there is a small chance the market could surprise everyone and head to new all time highs. Let’s look at what would have to happen to create this scenario?
1. Oil would need to head back to $50/barrel. This would alleviate major concerns over oil company debt. The move would need to happen quickly to avoid major defaults. The time frame would be in the next month. If oil shoots back up, the banking stocks would jump higher as investors stop worrying about how much exposure they have to the impending defaults.
2. Janet Yellen would need to give the pause signal for future rate hikes for the remainder of 2016. This may happen if the US stock markets continue to stay shaky and the global recession continues to worsen.
3. China infuses a massive stimulus package that starts seeing growth return. Any uptick in economic data in China will send the world markets soaring. In addition, it would add fuel to a commodity rally.
4. Investor sentiment gets so bearish, a short covering rally could be epic and cause the markets to retest and break the highs. Investors, realizing they are on the wrong side, jumping back on the buy side.
While intriguing to think about, the likelihood of these things happening in the near term of maybe 5%.
Chief Market Strategist