Challenges Linger for Europe Bank ETF

While exchange traded funds tracking U.S. banks are getting a lift from speculation that the Federal Reserve could raise interest rates in December, the European banks remain hamstrung by bad loans and other issues, which are weighing on the iShares MSCI Europe Financials ETF (NYSEArca: EUFN).

Market observers have warned that the ongoing monetary polices and depressed rates would weigh on banks’ bottom line as firms would find it hard to make money with a flat yield curve – banks borrow short-term and lend long-term. However, European growth is picking up, which could trigger greater demand for loans.

German banking giant Deutsche Bank (NYSE: DB) is among the names weighing on EUFN.

“After bouncing in early July following Brexit, and testing that low in early August, DB has failed to follow through on its attempted false breakdown. And, as of today, the stock has broken below its potential double-bottom, hitting a new low for this move,” according to Dana Lyons.

Italian banks have been under pressure to sell assets to support their troubled balance sheets. Italy’s fragile banking sector, the largest sector allocation in EWI, is in focus as global market participants fret about Brexit’s impact on Italy’s banks. The Italian government has been under pressure to calm concerns over its ailing banking system, which underperformed in the European Central Bank’s 2014 financial stress test and is holding €360 billion, or $410.5 billion, in bad loans.

Investors can play further weakness in EUFN and European banking names with the new Direxion Daily European Financials Bear 1X Shares (EUFS), which debuted last month. EUFS is an inverse though not leveraged ETF.

“The 600 Bank index has not suffered nearly the sort of breakdown this month that we see in DB and is holding back above its post-2009 Up trendline. However, it too has begun to falter. And considering the fact that DB is the 4th largest bank in Europe (according to Statista), and considering the challenging fundamental similarities among other European banks, it is difficult to believe this is a one-off,” adds Lyons.

iShares MSCI Europe Financials ETF

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