Financial shares weighed on European indexes on Wednesday amid doubts over US tax reform plans and the “Trumpflation” trade and concerns over EU lenders’ earnings and over non-performing loans in Italy.
“Trumpflation” refers to bets on rising rates, inflation and stock prices made after Donald Trump won the US presidential election a year ago this week. “In reality what we have seen in the last 12 months is plenty of evidence of backlash against globalisation, hostility and controversy, but very little in the way of fiscal policy,” Deutsche Bank analysts said in a research note.
The pan-European STOXX 600 dipped 0.1 per cent as the indexes of financial services and banks fell 0.4 per cent and 0.2 per cent, respectively, in line with a similar trend in early trading on Wall Street. Bond market movements were also pushing banks down, with a global yield curve flattening phenomenon spreading.
“Ten-year yields have been sliding back again; that’s going in the wrong direction for banks,” said DNB strategist Paul Harper.
The Italian banking sector and the issue of non-performing loans were also on investors’ minds. Creval’s move to raise cash in order to shed bad debts prompted investors to dump the shares of the lender’s domestic peers on concerns they may also need fresh capital.
Shares in Creval plunged 30 per cent following the announcement of the share issue. Banco BPM, Italy’s third-largest bank, and BPER Banca fell 7.5 per cent and 4.4 per cent, respectively.
Also weighing was French bank Credit Agricole, which said weak trading had dented third-quarter profits, sending its shares down 3.6 per cent at the close.
Earnings from France’s Natixis and OneSavings Bank pushed their shares up 2.3 per cent and 2.9 per cent, respectively. “We continue to regard OneSavings as an outstanding, low-risk, buy-to-let-led business, which (for us) remains too cheap,” said Investec’s Ian Gordon.
Analysts have turned negative on eurozone bank earnings after upgrading expectations for much of 2017 as sentiment improved thanks to a recovering economy.
The automobile sector was a drag on yesterday’s trade and closed down 1.3 per cent. Volkswagen retreated 2.2 per cent after a parliamentary committee said it had yet to fix a third of the cars affected by the UK diesel emissions scandal. Danish pharmaceutical firm Lundbeck fell 7.3 per cent as sales of newer drugs, like those to treat bipolar disorder, undershot expectations. French gaming company Ubisoft touched a fresh record high after it beat its second-quarter sales target, boosting its shares by 9.2 per cent to lead gainers.
“The rate of growth is supporting a turnaround in earnings per share in Europe; that’s why we are overweight European stocks,” said Francois Savary, chief investment officer at Prime Partners.