European Banks Soar On Rumor ECB May Monetize Bank Stocks; Japan Crash Continues

While algos patiently await the only thing that matters for US stocks today which is Janet Yellen’s testimony before Congress expected to be released at 8:30 am (and previewed here), the rest of the world this morning is a hot mess of schizophrenic highs and lows.

One look at Asia this morning and it was more of the same: another deja vu session for Japan where the relentless surge in the Yen pressured the Nikkei lower by another 2.3%, pushing it down to 15713, to the lowest close since October 2014. The MSCI Asia index was likewise down 1.4% with all 10 sectors falling.

Europe, however, was a different story entirely: following yesterday’s late afternoon FT “trial balloon” that Deutsche Bank would part with much needed liquidity to repurchase bonds in the open market (perhaps to indicate how unconcerned it is about the future), the German bank was up already over 4% in the premarket, and then proceeded to absolutely explode, soaring as much as 15% higher, up 13.15% at last check in Frankfurt, on what is likely a combination of short covering and a rumor which hit about an hour ago, when a German newsletter reported that the ECB could buy bank stocks as part of its QE.

We would be very surprised if in a world in which central bankers are being openly called out by markets that their bags of tricks are empty, the ECB were to actually do that, but we doubt the ECB has any intention of actually buying bank stocks: if anything, intention is far simpler – to slow down the relentless selling in Europe’s most systematically important bank, which between the FT trial balloon and today’s rumor, it has achieved… for now.

Also as a result, following 8 brutal days of carnage which sent European stocks to the lowest level since October 2013,Europe is solidly in the green, with the Stoxx up 2.3% the same as the Dax, however nothing compares to the European banking sector which as shown in the chart from Mark Barton below, is quite literally all green: not a single bank in Europe is in the red this morning.

We expect that today’s volatile European bank euphoria will be brief if not validated by concerte actions, because while central banks have the luxury of jawboning, commercial banks are actually burning through funds – rapidly at that – and don’t have the luxury of hoping for the best while doing nothing.

Which brings us back to Yellen’s testimony, which Jim Reid previews as follows: “Yellen can give the market hope today that the committee is acknowledging the worrying signs from both financial markets and the global economy and take a step closer to a cleaner dovish stance. That would certainly help if for no other reason than it would halt the dollar bull market (notwithstanding the recent sell-off) which has caused problems with commodities, EM, China and encouraged shrinking global dollar liquidity. However we won’t get such a turnaround in one speech. If it happens it’s likely to be a multi month story.”

Alternatively, she can just as easily send stocks reeling with one word out of place.

We will find out shortly which word she picks. For the time being, here is where markets stand right now.

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