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Dec 27, 2018

Markets: European Lenders Lag in Bank-Stock Rout

The Wall Street Journal.
Markets Bull logo.
Greetings. I'm Jessica Menton, here with your pre-market update.
Futures are lower this morning after the Dow surged more than 1,000 points yesterday, its biggest one-day point gain ever. We're monitoring whether the blue-chip index and the S&P 500 can sustain the rebound after a bruising selloff earlier this week put both on the brink of a bear market.
Plus, reporters Margot Patrick and Avantika Chilkoti weigh in on why European banks are facing challenges right now.

Markets in a Minute

Markets Data

Overnight Developments

  • Global stocks were mixed Wednesday as anxiety persistsed about slowing economic growth and uncertain policy out of Washington.
  • Read our full market wrap here
  • Japan's Nikkei Stock Average, which rose 3.9% overnight, has climbed for two straight sessions, nearly erasing Tuesday’s losses that pulled the index into a bear market

Lenders Seek Relief as ECB Exits Easy Money

By Margot Patrick and Avantika Chilkoti
If it is bad being a bank in the stock market right now, being a European bank is even worse.
The Euro Stoxx banks index is down 34% this year, compared with a 23% fall for U.S. banks in the KBW bank index. The sector is trading more than 40% below book value and the cost of insuring European bank debt against default has doubled from a year ago.
Worse, there is no apparent catalyst for a reversal soon, say some bank analysts. The low interest rates and economic and political uncertainty that drove share-price falls this year are all expected to extend well into 2019. If the global economy deteriorates, European banks have more to lose than peers elsewhere, analysts and investors say, because of their persistently low profitability.

A bright light for banks had been the prospect that extraordinary monetary policy would end, paving the way for higher interest rates. Years of low and negative rates have held back banks’ net interest margins, the difference between what banks pay for funding and make from loans.

Except the European Central Bank’s tentative exit from easy money in 2018 didn’t provided much relief for banks. It stopped its quantitative easing program, which arguably helped banks by keeping funding costs low. Yet the ECB has signaled it will put off lifting benchmark interest rates—still deeply negative—until at least summer 2019.

Fractured politics are also weighing on European banks. Brexit holds out the possibility of major economic disruptions. And national leaders once seen as capable of ushering in economic reforms, including Angela Merkel of Germany and Emmanuel Macron of France, have been badly weakened by domestic politics.
European banks took a harder road to recovery than American and Asian peers after the financial crisis, starting out with less capital, and business models that couldn’t stand up to a raft of postcrisis regulation. Then came the eurozone crisis, delaying much-needed restructuring and prompting ECB bond-buying programs.

Over the past few years, Europe’s economy grew again, and borrowers haven’t had trouble paying back low-rate loans and mortgages. But banks have struggled to improve their returns on equity, mainly because of their low net interest margins.

Market Facts

  • All three major indexes snapped a four-day losing streak Wednesday, posting their biggest percentage gains since March 2009. Still, the S&P 500 and the Dow are off 16% and 15%, respectively, from their most recent highs.
  • The consumer-discretionary and technology sectors in the S&P 500 rallied just over 6% Wednesday to also post their largest percentage increases since March 2009.
  • On this day in 1928, portfolio manager Walter Morgan founded the nation’s first “balanced” mutual fund called Industrial and Power Securities. It was later renamed the Wellington Fund, and eventually formed the nucleus of the Vanguard Group of Investment Companies.

Key Events

U.S. jobless claims, out at 8:30 a.m. ET, are expected to slide to 218,000 from 214,000 a week earlier.
The Conference Board's consumer-confidence index for December, released at 10 a.m., is expected to fall to 133 from 135.7 a month earlier.
U.S. new-home sales for November, also due at 10 a.m., are expected to rise 4.8% to an annual pace of 570,000.

Must Reads

A sign alerts visitors to the closure of the National Archives in Washington on the fifth day of a partial government shutdown on Wednesday. PHOTO: JIM LO SCALZO/SHUTTERSTOCK
A long shutdown could make volatile markets worse. The danger, analysts said, lies in the prospect of a prolonged stalemate, coming at a time when investors and businesses are already jittery over multiple factors.
To beat the trade war, companies are getting creative. In this Wall Street Journal video, we explored several tactics that some companies are using to dodge U.S. import taxes.
In a booming oilfield, natural gas can be free. American energy companies have spent billions of dollars in the past decade exploring for natural gas. But in parts of Texas and New Mexico, there is now so much of it that it is sometimes worthless.
Chief executives and bankers retain ties to Saudis. Western investors are struggling to decide how to preserve their relationships with Saudi Arabia’s crown prince after the murder of journalist Jamal Khashoggi.
Shareholders retreat from Chinese companies. Of the 3,500-odd companies listed on China’s two main stock exchanges in Shanghai and Shenzhen, a third had substantial shareholders—with at least 5% ownership stakes—who reduced their holdings this year. tries to "change the narrative" with restructuring. The e-commerce giant is revamping operations in what analysts said is a bid to calm investors about the company’s plunging stock price.

What We've Heard on the Street

“Retailers had one of the strongest holiday seasons in six years. But judging by their stocks, it looks like the malls were deserted all through December.”
—Heard on the Street columnist Elizabeth Winkler

Stocks to Watch

Alphabet: Shares of the Google parent, which are flat for the year, climbed 6.4% Wednesday, their largest percentage increase since August 2015.
Apple: The tech titan's stock rallied 7% Wednesday, its biggest percentage rise since April 2014. The company's shares are down 7% in 2018, on course for their worst year since 2008.
Kohl's: The retailer's stock, which soared 10% Wednesday, has slumped 12% in the fourth quarter but is still up 22% in 2018. 

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