AT the end of yesterday’s European trading session, the equities market was a sea of red. European banking stocks were sold across the board, with the French banks being hit hardest. BNP Paribas fell by more than 10 per cent. Its Gallic brothers in arms, Societe Generale and Credit Agricole, also took a heavy battering, amid a fear that Moody’s ratings review of the French banks could become a downgrade this week.
So why are the Continental and, in particular, the French banks looking so vulnerable? The biggest worry is uncertainty about the size of their exposure to the event of a Greek default. If Greece finally caves in, and should there be a domino effect within the Eurozone periphery, then there would be a significant writedown of assets in the European banking sector. Estimates suggest that holdings of sovereign debt by European banks tops €3 trillion, or around 8 per cent of their assets. The bond markets yesterday did nothing to assuage these worries. The yield on one-year Greek bonds hit an eyewatering 117 per cent, with default looking a foregone conclusion.
French Central Bank head Christian Noyer and Societe Generale chief executive Frederic Oudea gave statements yesterday, doing their best impressions of Rene Artois in an ‘Allo ‘Allo sketch – telling everybody “there’s nothing to see here” – as French banking stocks tumbled around their ears. But markets paid them scant attention.
So should traders be trying to cash in on this volatility? “Trading in French banks is definitely for the brave or the crazy at the moment,” says Ian O’Sullivan, head of sales at SpreadCo. Despite the statements made by Oudea and Noyer yesterday, he advises that “if yesterday’s price action is anything to go by,” any profitable trades should be banked straight away. “It seems that any sort of rally will be met with selling interest for the moment,” says O’Sullivan. “So better to bank a profit on a short term trade and move on than see it turn to a loss just as quick.”
And – listen very carefully, I shall say this only once – any traders looking to profit in the French equity markets should pay particular attention to their stops.