Here’s a preview of one of the things we’ll be discussing on the Fast Money Halftime report today:
Even before today’s news, the market had gradually removed the potential for a systemic banking crisis from Europe. U.S. and European banks were highly correlated for the last 5 years until the middle of 2011, and since then, policymaker initiatives have made investors more comfortable that European banking weakness won’t infect U.S. banks. The following comparison of XLF vs. SX7E makes that plainly evident:
U.S. banks are down less than 10% vs. 1 year ago, while European banks are down closer to 50%. However, within the U.S. banking sector, it is clear that the investment banks without U.S. retail banking exposure are at greater risk of global weakness hurting their earnings power going forward. Here is a chart in the last year comparing, C, JPM, and WFC:
C is the most internationally exposed U.S. bank, with only a small U.S. retail business, WFC is almost totally U.S. focused with only a small investment banking business, and JPM is part domestic retail bank, part international investment bank. The problem for U.S. banks is that this is not the same scenario as 2010 or 2011. The European policymakers have been successful in preventing a global banking crisis. The real risk for U.S. banks going forward is global economic weakness hurting growth more broadly. As I showed in my CotD yesterday, the Citigroup Surprise Index for emerging markets is much weaker than in 2010 or 2011, indicating that current market weakness is not a purely European phenomenon:
Weakening global growth is the key to watch for Q3, not just for financials, but for all sectors. In that regard, the outlook does not look rosy from my seat.