Stocks swoon as ECB boost fades

Summary:

• European banks reverse lower after ECB decision

• Deutsche Bank down by more than 5%

• US500 breaks key support at 2760

There was an interesting reaction in stock markets to the latest ECB decision with initial optimism giving way to pessimism in little time at all with several major benchmarks breaking lower not long afterwards. Nowhere was this more evident than in the EuroStoxx 600 bank index, which jumped higher as the ECB announced the TLTRO but has since reversed in an ugly fashion and come under some heavy selling pressure - weighing on the broader markets as it fell.

Banks in the EuroStoxx 600 (white line) reversed sharply after initially rising on the ECB decision, dragging lower the broader markets (yellow line). Source: Bloomberg

One of the banks worst hit was Deutsche Bank which has now fallen over 5% on the day after trading in the green around lunchtime. While the TLTRO are in effect stimulus measures which should make it cheaper for the banks to lend, there are a couple of permutations from the act which could actually be seen as negative for them. First and foremost, banks are arguably the most sensitive sector to interest rates and the announcement that any rate hikes will likely be pushed back is clearly a negative development. The interest rate which banks receive on deposits that mandatorily placed with the ECB has been negative for several years now, and any hopes that this would change anytime soon have now been dashed further. Secondly, the fact that the ECB felt it was necessary to take these measures could be seen as revealing an underlying weakness in the economy and this doesn’t bode well for lenders.   

Deutsche Bank has tumbled after initially moving higher after the ECB announced the TLTRO, with the stock now lower by more than 5% on the day. Source: xStation

The longer term picture for the market remains not too pretty with price once more failing at resistance around 8.32. A rising trendline from the low seen at the end of last year comes in around 7.50. Source: xStation

While these moves have had a clear impact in Europe, they’ve also been felt across the pond with the US indices following similar price action. The US500 has dropped to its lowest level in 3 weeks after falling below prior support around the 2762 level and the market could now be set for more downside towards 2730. A large decline on Monday served as a warning for what’s to come and if the market can’t reclaim the 2762 mark then a deeper correction could even follow with a move to 2676 not out of the question.

The US500 has made a potentially decisive break lower today and if price fails to reclaim 2762 then this move could stick. Levels to watch on the downside are 2730 and 2676. Source: xStation