Sentiment on Financials Remains Poor After Last Week’s EU Actions

The recovery in bank stocks of the last two weeks came to a halt as the hopes for a quick-fix to the current debt crisis in Europe from the ECB and EU leaders melted away early this week. The shares of all major banks slumped in trading on Monday as investors had sufficient time over the weekend to mull the impact of the EU leaders’ 2-day summit that concluded on Friday.  RBS (NYSE:RBS) lost more than 7% of its value in the market followed by a 6% slide for Morgan Stanley (NYSE:MS). Stocks have swung wildly since Thursday last week when major bank saw their shares slide by at least 5% as the result of the EU summit that weighed on investor sentiment. The agreement among 26 of the 27 EU nations towards ECB’s “fiscal compact” requirement then managed to create an uptick on Friday with European banks gaining, led by the 7% rise in Barclays’ (NYSE:BCS) shares. It looks like the search for the silver bullet to the Euro debt epidemic has begun all over again and doubts are rising that one might eventually be found.

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The ECB Spoiler

The European Central Bank (ECB), which is responsible for administering the European Union’s monetary policy, failed to live up to the hyped investor sentiments last Thursday with its announcement that it will not necessarily buy more European bonds to help alleviate the region’s debt problem. It also threw a wrench into the quick-paced efforts by leaders of EU nations by holding on to the need for a “fiscal compact” – wherein stricter budget rules would govern all member nations.

Eurozone Leaders Actions

European leaders finally agreed to new fiscal rules by the end of the summit on Friday. In an unprecedented show of solidarity in the region, leaders of all 17 euro nations and of 6 other EU nations agreed to sign a new treaty to save the region’s economy. ^[1] The new inter-governmental treaty will enforce tighter budget constraints and automatic sanctions in case of failure for member nations – in-line with the ECB’s demands. The U.K. was the only EU nation that chose to stay away from this agreement after its demands for concessions were rejected.

These developments helped repair damaged sentiment to a good extent on Friday combined with the positive jobs and consumer confidence reports in the U.S.

… But it was Clearly Not Good Enough

While the agreement reached at the summit is a step in the right direction, it is perceived as a long-term measure which will do little to alleviate the debt situation over the coming months. As markets looked for signs that the ECB would loosen its purse strings and absorb debt from the region at a quicker pace, the ECB’s confirmation that it’s not willing to take these measures at this point continues to weigh on investor sentiment.

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1. Europe moves ahead with fiscal union, UK isolated, Reuters, Dec 9  2011 [↩]