Europe Bank Rally

by Jonathan Adams

European banks have had an epic run this month, and investors are positioning for more to come. As lenders rallied the most among industry groups in March, options traders doubled down. They pushed the volume of bullish contracts on the Euro Stoxx Banks Index to levels never seen before, and the number of outstanding calls reached a two-year high versus bearish puts.

While years of underperformance have cheapened Europe’s banking stocks, factors that have long dogged the sector are starting to reverse. Improving economic data are paving the way for tighter monetary policy and hence potentially wider margins. At the same time, political risks — a major concern for investors at the start of the year — are fading as polls indicate anti-European Union candidate Marine Le Pen is unlikely to become the next French president.

“You can start to see almost an unseemly rush back into European banking stocks,” said Chris Beauchamp, a market analyst at IG in London. “If one can read the signs for themselves and put the improving fundamentals with the still relative cheapness compared to the U.S. and the uncertainty with what happens with Trump stimulus, you can see why European banks do look quite attractive.”

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