Euro banks: reasons to be overweight

Key points:
  • STOXX up 0.7%
  • German business morale rises in May
  • Takeover bid boosts Siemens Gamesa
  • U.S. stock futures rise


At the start of the year banks were an almost consensus buy but the trade quickly turned sour as investors fled the sector, scared away by risks of a stagflation shock.

Now European banks (.SX7P) have lost around 25% from their February peaks, are heavily de-rated, and the traditional positive correlation with bond yields has entirely broken down.

Yet Citi believes banks deserve an overweight allocation and even though in earlier periods of stagflation the sector has shown mixed performances, this time should be different.

"In previous episodes of stagflation bund yields have ended up declining and/or unemployment has risen. This time around we see higher real & nominal yields and expect unemployment to remain stable and low vs history," says the U.S. bank.

"We reiterate our overweight stance on European banks," it concludes.

(Danilo Masoni)



Weak sentiment in Asia has not stopped investors from re-engaging with European equities this morning.

The pan-European STOXX 600 (.STOXX) is up 0.9% with gains spread out wide across sectors and regional trading centres.

Miners and oil majors are doing a good chunk of the heavy lifting but other cyclical sectors such as retail and travel & leisure are also in a risk-on mood.

Wind turbine maker Siemens Gamesa (GTQ1), up 6%, is leading individual stocks after Siemens Energy (ENR0) launched a bid for minority holdings in the struggling unit.

In Britain, there was a warm welcome to Q1 results of home improvement retailer Kingfisher (KGFHF), which rose 2.5%.

Among smaller stocks, shares in Deutsche Euroshop (DEQ) surged over 40% after a consortium of bidders offered 1.4 billion euros to acquire the German shopping centre investor.

In the retail space, British online greetings card company Moonpig got a boost after agreeing to buy Smartbox, a gifting experiences platform, and its shares were up about 10%.

All sectors in the black:

(Julien Ponthus)



Capitulation in financial jargon refers to a moment when investors lose all hope in a market rebound and simply try to save whatever is left by dumping their holdings.

Clearly, Friday's volte-face on Wall Street during the last hours of trading showed that this dreaded moment hasn't materialised yet after the S&P 500 (SPX) pulled itself out of bear market territory.

One ray of light for investors during the latest market turmoil has been volatility which has stayed well below the levels reached during previous selloffs.

Still, even if the S&P 500 has managed so far to avoid closing 20% down from its January highs, its 18% slump year-to-date, combined with its longest losing streak since the dotcom crash of 2001 is fuelling fears for what's to come.

As long as the inflation genie is out of the bottle, it would arguably take a carnage across stock markets to trigger the so-called 'Fed put' and see the U.S. Federal Reserve to abandon its aggressive policy tightening path.

Short term however, stock futures are pointing towards an upbeat session in Europe and in the U.S. despite losses in Asia, particularly in China where Beijing reported the most number of cases seen during the current COVID-19 outbreak.

The usual mix of slower growth and rising inflation was also weighing on markets with Singapore reporting a key consumer price gauge rising at its fastest pace in a decade while Vietnam warned reaching its 2022 growth targets would be very challenging.

Key developments that should provide more direction to markets on Monday:

- Germany's IFO survey

- Speaker corner: European Central Bank's Robert Holzmann, Joachim Nagel. Bank of England Governor Andrew Bailey. Federal Reserve's Bostic.

- Euro zone finance ministers meet on fiscal rules reform, banking union.

(Julien Ponthus)


European futures on the rise despite stress from Asia (0540 GMT)

European and Wall Street futures are pointing towards an upbeat open despite headwinds from Asia where stocks are under pressure, notably in China.

Hong Kong's Hang Seng Index (HSI) is down 1.7% and the mainland's CSI300 Index (399300) is losing dropped 0.7%, led by a 2.9% decline in technology firms (.HSTECH).

Bourses in Europe are by contrast on course to make gains in the region of 1% when the bell rings with the euro currently rising about 0.25% against the dollar.

(Julien Ponthus)


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