I’m getting concerned about European financial stocks.
When I look at the iShares MSCI Europe Financials ETF (NASDAQ:EUFN), I start to think we are at a turning point for the sector. After having outperformed for several months, it’s still not significantly underperforming.
Why does this matter? Because it’s hard to have a healthy risk-taking environment in Europe if there isn’t much confidence in European financial stocks and their performance. And it’s hard to have much confidence in sustained risk-seeking behavior without the Eurozone looking stronger overall.
The stark contrast between the economic landscapes of Europe and the United States has become increasingly evident. The United States has seen its economy expand robustly. Consumer spending is up, unemployment rates are falling, and the financial sector in the U.S. is improving outside of regional banks. This reflects the overall optimism about the country’s economic trajectory.
In contrast, Europe’s economic recovery has been less pronounced. The ECB doesn’t seem to quite know what to do. Inflation seems to be reaccelerating, but strain on many European economies makes it challenging to really act decisively. European banks and financial institutions are bearing the brunt of the continent’s economic woes.
Anticipation is growing around the potential for sooner-than-expected monetary easing from the ECB as a catalyst for economic acceleration, but there are a lot of different opinions on future for interest rates. Monetary easing could take several forms, including further reductions in interest rates or expansions of asset purchase programs. But can the ECB really do those things if inflation isn’t dead yet? Can the ECB really stimulate the economy if corporate credit spreads are still historically tight?
The Bottom Line
The financial sector will remain a critical indicator of Europe’s economic health. As such, the coming months will be crucial, and European financials stocks are very important to watch here.
If European financial stocks can hold onto gains, it would suggest that investors are confident that any inflation is transitory and the ECB won’t hike rates in response. If European financial stocks break down here, it could serve as a nasty signal that MORE hikes are coming, and that credit stress comes as a result.
Either way, as I keep stressing, this remains an unclear “bull market” given the unevenness of momentum across the board. European financial stocks may further complicate things should they not hold onto their gains at a moment in the cycle where everyone is convinced the ECB will cut rates before the U.S. In reality, neither the ECB nor the U.S. may cut rates at all this year.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
