As reported earlier this week, Brexit’s impact on the world economy, while unknown, is likely to be very little. But the impact on the financial sector is another matter, especially the banks. The Brexit losses in the equity markets have been recovered. It is as if the vote never happened. But not in banks stocks. Here is the one year daily chart of the ratio of European bank stocks (EUFN) to European equities generally. Using the ratio makes the underperformance of the banks easy to see. The Brexit-induced bank stock collapse is clear and there has been NO recovery.
The U.S. banks are not much better. Here is the one year daily chart of the ratio of U.S. bank stocks (BKX) to the S&P 500 index. Once again, NO recovery.
Why is this? The bank stocks are trying to tell us something. The perception of risk in the banking system is on the rise. Do I know what the problem is? No, and I don’t need to know.
Now, what benefits most from a problem in the banking sector? This chart gives you the answer.
The red line is the BKX/SPX ratio as it trends down. The black line is the gold price in U.S. dollars. No wonder gold is on wheels; the financial system is perceived to be in trouble as the bank stocks are clearly signalling.