Bank Bounce? – $DB

by Dan June 16, 2016 4:07 pm • Commentary

Regular readers know I haven’t had many positive things to say about the prospects for banks stocks in 2016. My cautious view has had little to do with the recent concern emanating from the increased (yet still unlikely) likelihood of Brexit Leave vote. That tightening of Leave/Remain odds has had European banks testing the lows going back to the U.S. financial crisis in 2008/09 and Europe’s sovereign debt crisis in 2011/12.  The 10 year chart of the Euro Bank Index (SX7E) has been a slow moving trainwreck for years. While it has yet to make fresh all time lows, it’s important to note that major components Credit Suisse (CS), Deutsche Bank (DB) and UBS are all below the lows they made while Bear Stearns and Lehman were going the way of the dodo:

[caption id="attachment_64419" align="aligncenter" width="600"]European Bank Index (sx7e) from Bloomberg European Bank Index (sx7e) from Bloomberg[/caption]

The real culprit for the weakness in 2016 has to do with the yield curve as trillions of dollars in sovereign debt in the Eurozone now has a negative yield. Combine that with the belief by investors that most large banks in the region have yet to have the blood-letting in terms of deleveraging that U.S. banks did in the wake of the financial crisis.

DB has sort of been the poster-child for euro bank weakness. But today’s reversal off of all time lows might create a short term trading opportunity. Tragically the reason for the bounce was today’s news of the brutal murder of the Labour Party parliament member Jo Cox in the UK. She was outspoken in her favor of Britain remaining in the EU and given her history of humanitarian and charity work had been a voice for Syrian refugees in Parliament. Groups opposed to remaining have already promised to take a breather in the rhetoric following the murder. And with the referendum vote just around the corner on June 23rd, markets feel the remain vote will be more united. Because of all that, Europeans banks may continue to see a short squeeze.  It’s not my cup of tea to trade off of headlines like this, frankly it’s just tragic, but it is market moving and I wanted to lay out what’s going on.

For those of you who share my worldview on the bigger issues facing European banks, it’s important to be aware of these headlines and not press shorts at what could be an inflection point.

This looks like a spot where DB should bounce and if the UKvotes to remain the stock could easily be higher. I’d be inclined to look for an opportunity to short near $17:

[caption id="attachment_64420" align="aligncenter" width="600"]DB 6 month chart from Bloomberg DB 6 month chart from Bloomberg [/caption]