MorningWord 11/20/13: One of the least noticed aspects of the global market rally since the low in late June has been the leadership of European financials. After nearly 2 years of sideways price action, the European financials rose about 45% in practically a straight line from July to October:
The index is lower today, touching its 50 day moving average for the first time since July. European banks have been major beneficiaries of reduced financial stress throughout the European financial system, best evidenced by the drop in sovereign yields in the periphery. 10 year Italian and Spanish yields are now around 4.1%, 10 year Portuguese yields are 5.97%, and even 10 year Greek yields are down to 8.37%.
In contrast to the first half of 2013, when U.S. banks significantly outperformed while European banks lagged, the second half of 2013 has seen U.S. banks barely appreciate while European banks ripped. XLF did stage a breakout on Friday above the 21 level:
However, XLF is essentially flat since its July highs, while European banks are still up more than 35%. U.S. banks have been lagging both their European peers and other U.S. sectors since the summer.
As we approach the start of 2014, we are keeping a close eye on the relative performance of U.S. vs. European financials as a proxy for broader investment appetite for U.S. vs. Europe. Europe as a whole has been the leader since July, while the U.S. led in the first half. The behavior of the financials stocks is a strong confirming signal of where large institutional money flows are heading, despite the fact that most large Euro banks have been in the midst of de-leveraging, a process that is behind their U.S. brethren.