What can we deduce here?
Well, banks are likely to be far less profitable when interest rates are falling... and in the Eurozone firms' case, we see profitability dampened heavily with negative real rates of return.
This is likely due to the misallocation of capital that occurs with risk premium compression.
What could we argue is going to happen to US banks going forward then?
Well, we are likely going to see the Bank Index falter more and more as the Fed turns more dovish... rate cuts are becoming more and more priced in as data is not improving, or has not told the full story.
Take the recent NFP - most jobs were actually quite weak, even though the number was large.
My view is that US banks are likely going to face an exogenous shock from Europe and with Deustche's net exposure to derivatives sitting at 0.1% of EUR 60tn, it is likely going to come from here...
At the same time, I think Eurozone sovereign debt yields are priced awfully - Greek 10yy < US 10yy and BTP spreads remain subdued.
My thoughts - these risks will be translated into the G10 pairs soon enough and we shall see a explosion since G10 vol is at multi decade lows (maybe even all time lows).
http://www.macrodesiac.com for full insights.