European stocks fall, banks hit three-month low

On the tape the names kept giving ground. Deutsche Bank was off 1.36 percent. Banco Santander fell 2.34 percent. UniCredit dropped 2.69 percent. Societe Generale extended its losses for a second day alongside them. European bank shares fell for a second consecutive trading session amid the bond selloff, another stretch of selling that left the German, Spanish, Italian and French lenders at their weakest mark in more than three months.

The pan-European STOXX 600 moved lower across the board. Fixed at 600 large-, mid- and small-capitalization components drawn from 17 European countries and covering about 90 percent of the region’s free-float market capitalization, the index was down 0.8 to 1 percent through the session, printing at 625.44, then 624.26, 624.24 and 625.04 points. France’s CAC 40 fell between 1 and 1.22 percent, reaching more-than-six-month lows. Italy’s FTSE MIB dropped 1.3 to 2.51 percent. Germany’s DAX was off 1 percent. London’s FTSE 100 lost 0.7 percent. From Paris through Milan the national benchmarks turned lower in the same stretch of trading, the French and Italian indexes among the deepest declines on the board.

Outside Europe the pressure gauge sat near 5.32 percent on the US 10-year Treasury yield, the latest mark in a global bond selloff already weighing on equities. The heaviest losses were landing on the banks and on France.

“What you see in the European banks is this growing euro debt crisis that is weighing on growth expectations at a time when energy prices are pushing inflation expectations higher and the ECB is not going to be able to step in a way to give relief to the market,” Ozkardeskaya said.

The pressure had concentrated on France. Investors were dumping French government debt on fears of a government collapse in Paris, and the spread between French and German 10-year yields—the extra borrowing cost France pays over Germany—had widened to about 140 basis points, each basis point equal to one-hundredth of a percentage point. France’s budget deficit exceeds 5 percent of GDP. Bank of France Governor Emmanuel Moulin acknowledged that the fiscal position was serious, but he rejected emergency assistance from the European Central Bank. Rising sovereign debt costs at a moment when energy prices were lifting inflation expectations, with no ECB relief on offer, had carried the banks to that three-month low.

The way money was being repositioned against the weaker sovereigns was already taking shape. “We’re hearing many investors are now moving to the short side of the trade in terms of peripheral countries versus Germany,” Ozkardeskaya said. A short is a bet that prices will fall: traders sell borrowed bonds or shares now, aiming to buy them back cheaper later. The peripheral countries—those carrying heavier debt loads relative to the core—were being sold against German paper, the traditional safe benchmark inside the currency union.

The positioning followed an older template. Between 2009 and 2018 the eurozone crisis had shown how sovereign stress and bank balance sheets could reinforce each other. European banks held significant amounts of their own governments’ debt; when doubts rose about a state’s ability to repay, the value of those holdings fell, which weakened the banks, which in turn raised fresh questions about the sovereigns that might have to support them. That feedback loop had forced external rescue packages for Greece, Ireland, Portugal and Cyprus and left a lasting imprint on how investors priced the gap between core and periphery. The short now forming against the weaker sovereigns versus Germany was the same geometry, redrawn.

Oil prices climbed more than 3 percent—some prints showed 3.78 percent—on fears of supply disruption from the Middle East. On the STOXX, energy was the rare bright spot while most sectors traded lower. The surge in crude fed the same inflation worry that had already made central-bank relief look remote.

Davide Silvestrini and the JPMorgan strategy team read the same bank selloff as a buying opportunity. Silvestrini, who leads the team, argued in a report that the decline reflected sentiment and positioning rather than a fundamental break in bank balance sheets. The firm’s base case assumed limited room for further substantial rises in bond yields and projected that the direct hit from wider sovereign spreads would remain contained. What the strategists flagged instead were the indirect channels if French spreads stayed elevated: shifts in deposit structures and pressure on asset quality as the macroeconomic backdrop weakened. Those risks, they noted, depended more on market sentiment, on whether adverse scenarios materialised, and on how long the spreads remained wide than on any near-term mechanical shock to capital or liquidity.

Minutes from the Federal Reserve’s September policy meeting showed officials divided over the case for further rate hikes. Attention turned to the European Central Bank’s latest minutes for clues on the outlook, and to a slate of ECB and Fed speakers due later in the day. Markets waited on remarks from Bank of England Governor Andrew Bailey, due to speak later alongside the scheduled European Central Bank and Federal Reserve officials, comments that would be read for any signal on inflation versus growth.

The US 30-year Treasury yield traded near 5.71 percent. Brent crude topped $104 a barrel as reports circulated that the White House asked the Pentagon to draw up strike options against Iran before the midterms.