Live Markets: Position for euro zone banks to outperform - BofA

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27/02/2024 12:37

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    POSITION FOR EURO ZONE BANKS TO OUTPERFORM - BOFA
    The near-15% rally in Europe's STOXX 600  .STOXX  since the
end of October has been mirrored by the euro zone's banks
 .SX7E , but Bank of America's equity derivative research team
says it is positioning for banks to start to outperform.
 
    BofA notes that over 60% of European investors polled in
their latest fund manager survey still expect a growth slowdown,
which should cap gains in the broader market. 
    "With the risk of cooling growth momentum, we acknowledge
that broad European equities (SXXP) may struggle to rapidly
extend their gains," BofA notes. 
    "In our view, this offers a tactical opportunity to consider
upside relative value opportunities via the sale of SXXP calls
to purchase upside in select sectors."
    A sector they think may have further upside momentum is euro
zone banks, given stable fourth quarter profits, higher expected
distributions to ordinary shareholders and depressed valuation
multiples versus history. 
    Separately, if inflation pushes the ECB to cut rates
earlier, it may not hamper euro zone banks too badly, BofA says.
    "Indeed, the recent negative correlation of SX7E relative
performance to ECB rate expectations suggests that the SX7E
could outperform SXXP if more cuts are priced in this year."
    With that in mind, BofA likes to fund SX7E OTM (out of the
money) calls with the proceeds of an STOXX 600 OTM call.
    "The historically tight implied vol spread aids the pricing
of call-vs-call switches," BofA says.
    "Indeed, a short 9m (~Dec24) 35d call on SXXP now funds an
entire 9m 25d call on the SX7E, a number that is in its 92nd 5y
percentile rank," BofA adds. 
    
    (Samuel Indyk)
    ***** 
    
    FOR TUESDAY'S OTHER LIVE MARKETS POSTS:
    STOCK MARKETS' RECORD HIGHS ARE 'RATIONAL EXUBERANCE' -
INVESCO CLICK HERE
        "ARE WE ON THE PRECIPICE OF A NARRATIVE SHIFT?" 
    CLICK HERE
  
    RATE RE-PRICING, MANUFACTURING IMPROVEMENT TO SUPPORT RISK
CLICK HERE
    NEW PEAK FOR THE DAX IN UNEVENTFUL START CLICK HERE
    EUROPEAN FUTURES EDGE LOWER; MORE EARNINGS OUT CLICK HERE
    STOCKS HOLD FAST IN WAIT FOR INFLATION DATA CLICK HERE

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Higher for longer EU plays    https://tmsnrt.rs/49Rib2q
Banks    https://tmsnrt.rs/3SVEdtH
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