This ETF Is A Potentially Important Gauge Of Risk Appetite

There is no dearth of exchange-traded funds that have “benchmark” status, and plenty of those are believed to be sound gauges of risk appetite. One of the more overlooked ETFs in terms of gauging market sentiment and risk appetite might just be the Ishares MSCI Europe Fincls Sctr Indx Fd (NASDAQ: EUFN).

As has been previously noted in this space, for myriad reasons, European banks and EUFN are struggling this year. EUFN is off nearly 14 percent, a loss that is more than twice as bad the one incurred by the Financial Select Sector SPDR Fund (NYSE: XLF).

Related Link: Europe Banking ETF Faces Risks

Interest Rates, Banking Stocks And The Eurozone

If higher interest rates really are efficacious for bank stocks, then it is not surprising that European banks are being pinched. After all, the eurozone is home to negative interest rates. So is Switzerland. Nordic countries have employed negative rates as well; just look at Denmark and Sweden.

And that sentiment does not even scratch the surface of a borderline banking crisis in Italy, the eurozone's third-largest economy. Italian banks are almost 5.6 percent of EUFN's weight.

At least the European Central Bank (ECB) is doing what it can, how successfully is another matter, to prop up confidence in eurozone banks.

“On March 10th, at the last ECB meeting, the Committee surprised the market by announcing a new version of the 4-year TLTRO that would allow banks to refinance and roll their existing loans with the ECB ad infinitum,” said Rareview Macro founder Neil Azous in a note out Monday. “The entire event centered on reducing the risk premium for the bank sector. The message that was sent was that the stock and bond price of a bank – the real representation for financial conditions – is now a determining factor in ECB policy, not the effective lower bound of interest rates.”

What It Means For EUFN

To be sure, EUFN is not a dedicated eurozone ETF. Less than half the ETF's geographic weight is allocated to eurozone countries, meaning that in addition to the ECB, the Bank of England and the Swiss National, among others, impact this fund. U.K. and Swiss banks combine for over 42 percent of EUFN's. Those are the same Swiss banks being affected by the SNB's negative rate policy.

Azous points out that ECB policy, in essence, is bribing eurozone banks to take deposits and lend, but EUFN's price action does not really reflect what should be a rosier scenario.

“And yet despite what we refer to as the equivalent of an 'ECBribe,' European banking stocks are -7 percent from their levels preceding the ECB 4-year TLTRO announcement and -14 percent from their recent intraday highs in mid-March,” he said.

Disclosure: Todd Shriber owns shares of XLF.

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