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European banking stocks are ready for a rebound, Barclays strategists says

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European banks are finally showing signs of recovery and investors should be looking to reduce their bearish positioning in the beleaguered sector, according to Barclays strategists.

In a note published Wednesday, Barclays’ European banking and European equity teams projected that the stabilization of euro zone economic data and bond yields may bolster the banks, which have the most positive correlation to these two metrics of all European sectors.

“Euro zone composite PMI (purchasing managers’ index) is stabilizing and the key domestic drivers of activity are well oriented,” the note stated.

It added that in the meantime, bond yields and inflation expectations are “trying to find a floor,” which gives a breather to value stocks, those which trade at a lower price relative to their fundamentals.

On top of this, the Italian government is “showing some fiscal discipline” and the European Central Bank (ECB) has opened the door to new quantitative easing while “seeking to mitigate the drag from negative rates on banks.”

European banks suffered a sharp sell-off in the second quarter of 2019, shedding more than 13% over the past three months, and are down 18.64% over the past year.

However, they have begun to rebound slightly in recent weeks, gaining 5% over the past 30 days, and though consensus has the European banking sector at an underweight position, Barclays is maintaining an equal weight.

Short-covering expectations

The Barclays strategists, led by head of European equity strategy Emmanuel Cau, also highlighted that bank stocks at present are cheap and under-owned. As the third-worst performing sector year-to-date, many banks are trading at a “near-extreme valuation discount and offer and attractive dividend yield of 6%,” the note said.

Combined with depressed valuations and current bearish positioning from investors, this environment could lead to further “short-covering,” the buying in of securities that have been sold short (when traders bet they will lose value) in the hope of minimizing losses if the share price increases.

The note highlighted, however, that “structural headwinds are not going away,” with earnings remaining constrained by negative interest rate policy, and trade tensions, Brexit and anti-money laundering issues continuing to cloud the outlook.

But the analysts identified several banks which offer “quality at a reasonable price,” and have established overweight positions in Lloyds, Caixabank and ABN while remaining “skeptical of certain restructuring stories” involving Deutsche Bank, Standard Chartered, UBS and BNP Paribas.

The note suggested Deutsche would struggle to achieve the revenue it sought from a recent mass strategic overhaul, and questioned whether the German lender might need to raise equity within the next 12-24 months.

“In our view, many investors simply believe the sector is not investible anymore and see it as a value trap,” the note stated.

“While we agree that its medium-term profitability backdrop remains challenging, we think the some of the macro headwinds that exacerbated its recent underperformance are easing.”

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US-UK trade deal within a year of Brexit will be tight, UK PM Johnson

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It will be tight to meet the United States’ desire to do a post-Brexit trade deal with Britain within a year, British Prime Minister Boris Johnson said on Sunday.

Johnson, who took office last month, had his first bilateral meeting with U.S. President Donald Trump earlier on Sunday at the G7 meeting in France and the two discussed a range of issues including trade.

In interviews with British television media afterwards, Johnson said the United States wanted to do a deal within a year of Britain leaving the EU on Oct. 31.

“Years and years is an exaggeration, but to do it all within a year is going to be tight,” he told BBC TV.

Johnson also said the chances of Britain agreeing a Brexit deal with the EU were improving but it would be “touch and go”.

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Hong Kong police briefly turn water cannon on protesters, fire tear gas

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Protesters gather in Kwai Fong in Hong Kong on August 24, 2019.

LILLIAN SUWANRUMPHA | AFP | Getty Images

Hong Kong police briefly fired water cannon and volleys of tear gas to force back brick-throwing protesters on Sunday after violent clashes a day earlier during which police also fired tear gas for the first time in more than a week.

At least one petrol bomb was thrown by protesters. The water cannon, which had not been used in years of anti-government protests, soon pulled away.

The Chinese-ruled city’s MTR rail operator suspended some services to try to prevent people gathering but protesters made it to a sports stadium in the vast container port of Kwai Chung, from where they marched to nearby Tsuen Wan.

Some dug up bricks from the pavement and wheeled them away to use as ammunition, others sprayed detergent on the road to make it slippery for the lines of police. Clashes spread in many directions.

Police had warned earlier they would launch a “dispersal operation” and told people to leave.

“Some radical protesters have removed railings … and set up barricades with water-filled barriers, bamboo sticks, traffic cones and other objects,” they said in a statement.

“Such acts neglect the safety of citizens and road users, paralysing traffic in the vicinity,” the statement said.

Activists threw petrol bombs and bricks on Saturday in the gritty industrial district of Kwun Tong, on the east of the Kowloon peninsula.

The vast majority marched peacefully on Sunday.

‘Last Chance’

M. Sung, a 53-year-old software engineer in a black mask emblematic of the many older, middle-class citizens at the march, said he had been at almost every protest and would keep coming.

“We know this is the last chance to fight for ‘one country, two systems’, otherwise the Chinese Communist Party will penetrate our home city and control everything,” he said.

“If we keep a strong mind, we can sustain this movement for justice and democracy. It won’t die,” Sung said.

Protesters say they are fighting the erosion of the “one country, two systems” arrangement under which the former British colony returned to China in 1997 with the promise of continued freedoms not enjoyed on the mainland.

The protests, which started over a now-suspended extradition bill and evolved into demands for greater democracy, have rocked Hong Kong for three months and plunged the city into its biggest political crisis since the handover.

They also pose a direct challenge for Communist Party leaders in Beijing, who are eager to quell the unrest ahead of the 70th anniversary of the founding of the People’s Republic of China on Oct. 1.

Beijing has sent a clear warning that forceful intervention is possible, with paramilitary forces holding drills just over the border.

Transport to the airport appeared normal on Sunday, despite protesters’ plans for a day-long “stress test” of transport in the international aviation and financial hub.

Police said they strongly condemned protesters “breaching public peace” and that 19 men and 10 women had been arrested after Saturday’s violence. More than 700 have been arrested since the demonstrations began in June.

The neighbouring gambling territory of Macau, a former Portuguese colony that returned to Chinese rule in 1999, elected former legislature head Ho Iat Seng as its leader on Sunday – the sole approved candidate.

Ho, who has deep ties to China, is expected to cement Beijing’s control over the “special administrative region”, the same status given to Hong Kong, and distance it from the unrest there.

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At G-7, Trump says he is not happy about North Korea missile tests

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SAINT-JEAN-DE-LUZ, France — President Donald Trump said Sunday he was not happy after North Korea launched short-range ballistic missiles over the weekend.

“I’m not happy about it but again he’s not in violation of any agreement,” Trump said when asked about the recent string of tests from the North’s Kim Jong Un.

“I discussed long-range ballistic and that he cannot do and he hasn’t been doing it and he hasn’t been doing nuclear testing. He has done short-range, much more standard missiles, a lot of people are testing those missiles, not just him. We are in the world of missiles folks, whether you like it or not,” Trump said.

Meanwhile, Japanese Prime Minister Shinzo Abe said North Korea’s test was in violation of UN Security Council resolutions.

On Saturday, North Korea fired what appeared to be two short-range ballistic missiles into the sea off its east coast, the South Korean military said, the latest in a series of launches in recent weeks amid stalled denuclearization talks.

North Korea, the only nation to have tested nuclear weapons this century, spent most of Trump’s first year in office perfecting its nuclear arsenal. The newest member of the world’s exclusive nuclear weapons club has stopped testing of its nukes for now as the U.S. and international community offer the possibility of relief from crippling economic sanctions.

Under the third-generation North Korean leader, the reclusive state has conducted its most powerful nuclear test, launched its first-ever intercontinental ballistic missile and threatened to send missiles into the waters near the U.S. territory of Guam.

Since 2011, Kim has fired more than 90 missiles and had four nuclear weapons tests, which is more than what his father, Kim Jong Il, and grandfather, Kim Il Sung, launched over a period of 27 years.

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