Turmoil in European banks - what's happening and what are the opportunities? Turmoil in European banks - what's happening and what are the opportunities? Turmoil in European banks - what's happening and what are the opportunities?

Turmoil in European banks - what's happening and what are the opportunities?

Macro
Adam Seagrave

Global Head of Sales Trading

Summary:  Following the collapse of SVB bank in the US, European banks have come under renewed selling pressure as contagion fears grow and the EuroStoxx banks index falls by more than 8%. This article will look in more detail at what has led us to this point alongside what to look for in the price action and why Saxo as a financial institution provides both safety and security.


What is happening in markets now?

As the collapse of US bank SVB took place last week, authorities stepped in to contain the fallout and prevent a broader impact on the financial sector. New liquidity measures from the Federal Reserve and the announcement that both SVB and Signature Bank's depositors will be made whole were meant to shield the banking industry from contagion risks.

What we are witnessing now though is further turmoil as markets wrestle with deteriorating financial conditions and fears of contagion outside of the US banks. This is all set against the backdrop of excessively high inflation that central banks globally still need to tackle.

There’s still a lot of leverage in the system and interbank markets are seeing liquidity drying up. Volatility feeds further volatility in a similar feedback loop as we saw during the covid market turmoil and clients should ready themselves accordingly.

From a cross-asset perspective, equities and credit have held up way better than they should have during the whole hiking cycle.  Financial sector valuations have especially been booming, which has left the sector vulnerable to a re-pricing. The Stoxx 600 banks have fallen 15% since the SVB story hit last week but the index is still up +23% from the end of September 2022 (as illustrated in the chart). In a way, one could even say that this was long overdue and hence needed, even though the way it is unfolding is far from optimal.

Source: Bloomberg

What opportunities do you have in the current market situation?

For the simplest, low risk method to earn a return on your money, you may just wish to hold it as cash with Saxo. Saxo offer highly competitive rates of interest across multiple currencies.

For those equity investors that simply want to reduce overall risk, short-term bonds or holding cash on their Saxo account should be considered. Clients interested in learning what bonds are and what they can offer a portfolio in terms of income (especially on idle cash) and portfolio diversification can find a lot of useful information in our published Starter Guide.  Another consideration to add fixed income diversification is via a bond ETF; the iShares 20+ Year Treasury Bond Fund and iShares USD Treasury 7-10 Year UCITS ETF track the performance of a basket of bonds.

Saxo’s analyst Peter Garnry wrote in a note that small caps are always a bigger risk when financial conditions are tightening, so investors should consider reducing exposure to small caps. Quality companies with low debt levels, high return on invested capital and market leading positions should be preferred. Examples of ETFs providing exposure to different variations of quality are FCF US Quality ETF, VanEck Morningstar Wide Moat, and iShares Edge MSCI World Quality Factor UCITS ETF.

Thinking more about ‘Safe Havens’, John Hardy, Saxo’s Head of FX Strategy pointed toward the Japanese Yen and gold as the two most notable safe stores of value which roared higher as the focus on weak banks weighed on markets.

Those that see the situation worsening before getting better can look to adopt hedging strategies by adding short exposure. There are various instruments available for this on the Saxo platform including Inverse index tracker funds, which provide short exposure to a particular sector or index, buying of put options on individual stocks or a stock index which is like buying insurance, or lastly use of a simple Index CFD. Adding these instruments to a long equity portfolio will provide profits to off-set losses during a market down turn, a few of the inverse trackers include; Lyxor S&P500 Daily Inverse UCITS ETF (DSP5:xpar), Lyxor CAC40 Daily 2x Inverse UCITS ETF (BX4:xpar), Xtrackers S&P500 2x Inverse Daily Swap UCITS ETF (DBPK:xetr), Lyxor EuroStoxx 50 Daily 2x Inverse UCITS ETF (LSK8:xetr).

If the current situation doesn’t spiral out of control, the leading indicator is to look at correlations between bank share price moves. As long as all moves are extremely correlated, the market is macro/fear/risk unwind driven. As soon as correlations start to decrease, that’s the first sign that smart money and fundamentals are behind the wheel again­.

Why clients can trust Saxo with their money

Saxo offers very competitive rates of interest on client deposits and has taken strategic decisions that allow us to be in a strong financial position with a sound balance sheet and very low exposure to movements in long term interest rates. Saxo does not have a mortgage or commercial loan book and therefore is not exposed to the inherent risks of credit losses from those activities. Clients and partners can and should continue to trust Saxo to be a safe-haven to place their uninvested deposits during this crisis.

Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.