By Geoffrey Smith
Investing.com -- It’s as if the world suddenly believes the euro has a future.
Eurozone bank stocks are flying on Friday in the wake of the European Central Bank’s actions on Thursday to ramp up the monetary stimulus and put the doubting Thomases firmly in their place.
By 5:30 AM ET (0930 GMT), the Stoxx 600 Banks index was up 3.8% at its highest in nearly three months, after analysts gave a resounding endorsement of the central bank’s decision to throw another 600 billion euros at anybody daring to suggest that individual member states may face the odd solvency problem when the pandemic is over. The benchmark STOXX 600 was up 1.1% at 370.15 points, also a three-month high.
Coming less than a week after the European Commission also rolled out a bigger-than-expected 750 billion euro fund for supporting next year’s recovery (two thirds of it in the form of direct grants rather than loans), the ECB’s package suggests that the euro zone is in serious danger of having a coherent set of macro policies, with fiscal and monetary policy-makers pulling together for the first time in a decade.
Above all, that means that the tail risk of a eurozone break has been substantially reduced, and a long-term weight on the valuations of assets in the bloc’s periphery, in particular, has been lifted.
In the 10 days since the Commission’s announcement, the spread between Italian and German 10-year benchmark yields has tightened from 200 basis points to 175 – a three-month low – and is falling fast. The Spanish spread has come in from 113 basis points to 87 in the same timeframe. Portugal’s risk premium over Germany has shrunk by one-third in the same timeframe, while Greece’s spread has come in from 204 to 165 basis points.
Small wonder, then, that peripheral banks are flying: the bonds they hold are skyrocketing, and the easing of lockdown restrictions aimed at facilitating some kind of summer tourist season should also flatten the peak of non-performing loans, as more local businesses manage to keep their heads above water.
It that all sounds too good to be true - well, it may well be. BlueBay Asset Management Chief Investment Officer Mark Dowding warned in a blog post on Friday that “central bank purchases are fuelling asset price inflation as market technicals dominate. Yet this rally is coming against a backdrop in which the macroeconomy remains in a pretty dark place.” Not to be forgotten: the ECB’s latest growth forecasts for the bloc see the economy shrinking by 8.7% and not recouping those losses until after 2022.
But the Stoxx 600 Banks is still more than 40% below where it was in February. The sector has been one of the most reliable, longest-running dogs in the European investment universe – but then every dog has its day.