Is European QE Setting Up A Banking Pair Trade?

In a new note out today, Mint Partners analyst Bill Blain discusses the ECB decision to cut its primary interest rate to 0 percent. According to Blain, the rate cut and further easing will continue to work wonders for European financial markets while doing very little to support the real underlying economy.

“I am absolutely sure M. Draghi is well aware of the gapping difference between the real European economy and the ECB’s make-believe financial economy. Hope is not a strategy. Problem is, the structures and strictures of the Euro and the ECB political masters don’t allow him to acknowledge the inherent contradictions and likely failure of the current set up and policies,” Blain writes.

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He points out that Eurpoean bank balance sheets should tell investors all they need to know about what is really going on. While while non-performing loans (NPLs) on the balance sheets of U.S. banks peaked in 2009 and have since declined back to around 2.0 percent, the number has continued to rise for most European banks and has now surpassed 8.0 percent.

“Why? Because the US is fixed and Europe isn’t,” Blain explains.

For now, he believes that the latest easing measures will continue to prop-up European equities and investment-grade corporate bonds.

Investors looking to set up a pair trade to capitalize on the divergent paths of U.S. and European banks should consider going long the iShares Dow Jones US Financial (ETF) IYF and short the Ishares MSCI Europe Fincls Sctr Indx Fd EUFN.

Disclosure: the author holds no position in the stocks mentioned.