Banks were the top-performing sector in the Euro Stoxx index this morning, the beneficiaries of a clearing sovereign risk outlook in the wake of the French and other European elections. The Stoxx 600 Banks Index was up 1.14% this morning as of 7:00 a.m. EST.
Banks have underperformed the broad European market year-to-date due to concerns about systemic risk, nonperforming loans, undercapitalization and slow loan growth. They have some room to catch up. The overall financials sector has performed in line with the broad index.
The systemic risk part of the problem is improving. A key gauge is the cost of hedging against sovereign defaults (in fact, against redenomination of sovereign debt into a different currency). As the chart indicates this has come in sharply, as has the spread between peripheral bonds and benchmark German government bonds. This weekend’s decision by the European Union to give 8.5 billion Euros in debt relief to Greece was another big plus.