Financials should lead global equity markets higher

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by David Pett
Europe’s s long-term refinancing operation (LTRO) could fuel a rally in global financials stocks and drive equity markets higher over the next four months, says Steven Harris, equity strategist at Macquarie Capital Markets Canada.

“We think that this week’s LTRO results could act as a catalyst for further near-term strength in financials globally,” Mr. Harris said in a note to clients.

“Specifically, we expect an LTRO size in excess of 400bn EURO should produce a positive reaction in equity markets, with financials leading the rally higher.”

The European Central Bank conducted its second three-year LTRO on Wednesday, infusing 800 European banks with a larger-than-expected 529.5-billion EURO in cheap loans.

Mr. Harris said financials have underperformed during periods of stress over the past five years, particularly in countries where sovereign risk is highest, but the sector has also rallied powerfully in response to unconventional monetary policy initiatives such as QE1 and the ECB’s first LTRO operation.

Since Europe’s central bank alloted 489-billion EURO in three-year loans to more than 500 European banks in December, both U.S. and European financials have outperformed broader markets by approximately 5%.

Mr. Harris said further strength in financials would indicate the current rally has more upside and he forecasts the S&P 500 rising as much as 9% to 1,500 by mid-year.

“As a secularly weak sector, we would expect financials to top out before the broader market,” he said. “A softening in financials’ relative performance would be seen as a sign that the rally is running out of steam.”

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