European Banks Battered As Reality Sets In

European banks are getting absolutely hammered as the reality of a Euro crash, a bank run on Greece, and months of ignored fundamentals set in.

As Europe opened last night markets were very weak with Sovereigns gapping dramatically wider and equity and credit markets under pressure. Just as in the last few days in Europe though, early weakness has been tempered by a modest belief that the ECB will save us all if it gets bad enough. Today was a little different – as we noted it appeared the ECB was starting to play chicken a little more vocally and while equity, credit, and sovereigns rallied in their usual way off the open – there was one critical difference – financials did not. Early on it was clear that many traders were looking to place the short-financials, long-sovereign credit trade, this implicitly forced LTRO-encumbered banks to underperform (as Greek, Italian, and Spanish banks were crushed in stocks and spreads) moving the LTRO Stigma wider still – back near record wides (and subordinated spreads starting to decompress from senior again). The EURUSD was choppy but once the ECB headlines hit and rumors swirled of more bank runs, cessation of support, and capital controls, it fell back below 1.2700 once again (only to surge a little into the Europe day-session close – back to unch. Treasuries and Bunds were in lockstep – leaking higher in yield as the technical support for sovereigns came in (not from the ECB but via our financials-sovereign spreads arb) but this gave way into the close as risk asset weakness dragged yields lower in Germany. US equities faded into the Europe close (as normal) ending back at a balanced VWAP, with EU financial stocks down over 1% on average, and EU stocks overall down around 0.75% (BE500).

LTRO Stigma widened still further as financials underperformed – led by LTRO-encumbered banks…

but sovereigns rallied from early weakness as the financials vs sovereigns trade was the dominant technical – keep watching this as it will inevitably lead to sovereign weakness in a vicious circular manner…

Subordinated spreads have finally started to leak wider relative to senior spreads with today seeing that increase…


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