Are European banks falling because of France or Italy?
The best-performing sector in Europe took its biggest hit since March in just two days. The culprit is based in Paris, but the biggest bill may come from elsewhere. Anyone holding European banks or index ETFs should know what they are actually betting on.
Key points
European banking sector just had its worst two days since March and quietly entered a technical correction
Banks spent three years profiting from high interest rates, now high interest rates are knocking them down
The French ten-year yield climbed to 4.99%, the highest since 2002
A net 25% of European fund managers were overweight banks, making it the most crowded trade on the continent
Three October data points will decide whether this was a flush-out of positions or the start of something bigger
Triple in three years, then two days that broke it
European banks were the continent's best sector for two years and looked set for another strong year. Then came Wednesday, October 7: the Stoxx 600 Banks index fell 3.3%, and on Thursday, October 8, it lost up to another 2.2%. The worst two-day drop since March.
In two weeks the sector is down roughly 8%, the lowest since June, and has officially entered a technical correction. Société Générale $GLE.PA is down 25% from its August high, Deutsche Bank $DBK.DE is down 18% from its September peak, and Crédit Agricole $ACA.PA has lost over 15%.
It sounds dramatic, but for context: since 2022 the value of European bank stocks has tripled. And according to Bank of America's September survey, a net 25% of European fund managers were overweight banks. It was the most crowded trade in Europe, and crowded trades fall fast even when fundamentals change only slightly.
The question for your portfolio is clear - why are banks falling and when will it end?