3 European Banking Stocks Down More Than 35% In 2 Days

Brexit shook the global economy and shattered the illusion that all’s well after the volatility storm at the beginning of the year. While the world was rooting for “Bremain,” the voters in U.K. decided to exit the European Union (EU) in a referendum on Friday, which came as a bolt from the blue for financial markets across the globe.

Pre-Brexit Backdrop

Deeper slump in several major economies including Europe and weaker-than-expected expansion in the U.S. dampened the hopes for any improvement in the global economic outlook. However, expectations of another rate hike in the U.S. despite negative policy rates in some developed economies kept hopes for growth alive.

The European Central Bank struggled to drive regional growth and inflation after the 2008 financial crisis through stimulus and strengthening of its negative interest policy. The European economy covered up its vain efforts to jumpstart the eurozone by cutting interest rates. Despite these, several European economies are still stressed over softened growth and zero inflation.

Brexit Spillovers

Apart from global worries like volatile oil and commodities prices and deep-seated problems in China’s economy weighing on the markets, the world now has to worry about the economic and political uncertainty as a result of Brexit. The U.K.’s decision to exit the EU will undoubtedly make matters worse for the European economy, which is already plagued by fundamental weakness.

Therefore, it wasn’t a surprise that the global markets didn’t take the news in good spirit. European banks such as Credit Suisse (SIX:CSGN) Group AG (TO:CS) and Deutsche Bank AG (NYSE:DB) plunged more than 23% and 22%, respectively, in the last two days since the “leave” mandate, while most of the U.K.-based banks lost more than one third of their market value.

The U.S. markets were not spared either due to their exposure to the U.K. and Europe on the whole. Major U.S. banks like JPMorgan Chase & Co. (NYSE:JPM) lost over 10%, while Morgan Stanley (NYSE:MS) and Bank of America Corporation (NYSE:BAC) both sank close to 13% since the poll result. The S&P 500 index was pushed in the red for the year.

Aftershocks

In a major political setback, the British Prime Minister David Cameron announced his resignation as Britain voted to leave the EU. Also, ratings downgrade from top rating agencies warned of "an abrupt slowdown in short-term GDP growth" in the U.K. Of course, the break from the EU would have damaging economic consequences for the U.K. economy.

Regulatory differences with the EU would augment over time, impacting trade volumes and reducing the attractiveness of the U.K. for investment. London’s status as Europe’s premier financial hub is now at stake. Risks of job cuts are on the rise as several British banks had warned of moving thousands of jobs in the event of Brexit.

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Per a Zacks Investment Research

Written By: Zacks Investment Research