For the better part of the last year, European banks have been under intense selling pressure. Negative sentiment arose from headlines regarding the Greek crisis, to low interest rates. Now, however, a few European banks look to have bottomed.
The chart below is of Lloyds Banking Group (LYG) - Get Report and Barclays (BCS) - Get Report . Both European banks fell into a bear market last year due a wide range of issues surrounding underlying operations, as well as broader macroeconomic variables.
In 2016, however, a bottoming formation looks to have set up, with price action breaking higher in recent days.
There are a few reasons for the renewed optimism, which could carry share prices another 20% higher for both companies. First, geopolitical risks are abating. Greece's economy is slowly improving albeit at a pace that keeps its citizens restless. Greece's improvement though has allowed it to secure additional financing from its creditors.
Moreover, the U.K is looking as if it will stay in the European Union after all. Although the vote is still weeks away, there is speculation that the vote is becoming increasingly more swayed towards avoiding a "Brexit", or British exit from the EU.
With Geopolitical risks lessening, fundamental economic factors are also improving. China's economy is slowing, but the downside risks are thought to be lesser than once believed. Additionally, the U.S. is looking to tighten monetary conditions in coming months, a testament to the improving economic backdrop, which is also aiding financial companies.
Although many of the variables aiding European bank share gains remain uncertain, there is a wave of renewed optimism that could last through the summer. If you get long exposure to European banks, however, be ready to head for the exits quickly should the underlying environment begin to deteriorate as it has in the past.
This article is commentary by an independent contributor. At the time of publication, the author held BCS.