The european bank sector marches toward the rubicon

HEAD OF INVESTMENT RESEARCH, MINT EQUITIES

IT HAS been a good couple of weeks for the European banking sector. Firstly, the stress test results for banks across Europe were good; secondly, profits for the second quarter have been impressive. As you can see in the chart below, the European banking sector has pushed on strongly this week. However, we have yet to close above two key levels, which now remain pivotal to further medium-term gains.

The index has yet to rise above the 231-236 level, which is significant downward resistance. Until it can break this, then the banking index is in a classic downtrend.

In theory, with all of this good news it shouldn’t take too much from here to negate the prevailing downtrend and to move higher again. If this transpires, this would constitute a significant positive for the broader European equity market as well. Clearly, though, we have been here before and (twice) been disappointed as the requisite “new” buying interest has not materialised to carry us across the proverbial Rubicon.

Still, like most things technical, for European stocks to make a meaningful journey higher, it is imperative that investors make the essential breakthrough higher.

If investors get cold feet and aren’t as enthusiastic as we might have been led to expect, this could limit any upside. But if there is no meaningful break of the resisitence level – shown on the chart below – then this would be a bearish signal that woud suggest a leg lower for banking stocks.

Because financials are such a large part of the index, if they don’t gather some speed then European equities could stagnate.