European markets had a great ride since last summer. Especially financial stocks in Europe have outperformed. The question is: will this continue? Is it worth accumulating European financial stocks?
The short answer to that question is “most likely yes”.
The point is this: from an intermarket point of view financial stocks are highly correlated to interest rates. As European markets are highly correlated by German markets it is fair to compare German yields with European financial stocks.
Note that we spotted this trend already 3 months ago in this alert: German Interest Rates Starting Major Trend Reversal. That trend simply seems to continue.
The first chart makes our point. The light grey line represents Germany 10-year yields, the black line European financial stocks. The correlation between both assets is clear.
With that in mind the fundamental question becomes “how high can German rates rise” as that answers the question how attractive European financial stocks are.
The next chart answers the aforementioned question. German 10-year yields have declined over the last ten years. However, that falling trend stopped in 2017. Since early this year there is a clear uptrend in German yields. The most interesting trend, though, is the potential breakout visible on the chart (purple circle). If it is true that German yields have turned a long term decline into a rise then it would be great news for European financial stocks (German banks in particular of course as well).
Note: it could be that the dotted line marks the breakout point. We do not know for sure, it just could be the case. Smart investors simply do not exclude this potential scenario.