Financials lagging a rising market as ECB moves to cut QE prop

The European market has continued to rise, led by basic industries.

What has changed in the last two months, however, has been the ability of financials to keep pace. There are two fundamental problems with the sector. The market has assumed the end of the sub-prime bubble means a peak in the non-performing loan cycle. However, we have a further peak in residential mortgage refinancing to come as so-called Option ARM and Alt-A mortgages are rolled over in 2010 and 2011. Furthermore, many banks are still carrying “zombie” loans from the commercial real estate and private equity bubbles of the last cycle. The provisioning cycle may not have peaked at all. ...