The recent bout of weakness faced by financial services stocks and exchange traded funds is not confined to U.S. offerings.
With Portuguese stocks weakening on concerns over Espirito Santo Financial Group, the country’s largest bank, bond yields in peripheral European nations have climbed in recent days, breathing new life into what had been dormant investor concern regarding the fragility of financial institutions based in PIIGS countries. [Pressure on Portugal ETF]
The bank has been under scrutiny over the past month since an audit found “material irregularities” at the Espirito Santo family holding company, according to a separate Reuters report.
With Thursday’s almost 4% slide, one that occurred on nearly 11 times the average daily volume, the Global X FTSE Portugal 20 ETF (PGAL) is off about 11% in the past week.
That weakness has permeated the iShares MSCI Europe Financials ETF (EUFN) , which has tumbled 4.3% over the same period. EUFN’s glum reaction to the news out of Portugal underscores how seriously global markets take negative headlines flowing from Europe.
The $487.2 million EUFN features exposure to 13 countries and unless Portugal falls into fund’s 2% allocation to “other,” EUFN features no allocation to the country, according to iShares data.
Regardless of EUFN’s lack of direct Portugal exposure, the ETF could be facing technical problems that are on par with its U.S.-focused counterparts. [Trouble for Bank ETFs]
“Are European banks in trouble? If so, could weakness in the European financial sector spill over into stock markets around the world?,” asks Chris Kimble of Kimble Charting Solutions. “EUFN has formed a bearish rising wedge over the past few months and a few days ago broke below support.”
While EUFN does not have a direct Portugal problem, it does feature a combined 18% weight to Spain and Italy, two countries that investors are likely to repudiate if the situation in Portugal worsens. That much was on display Thursday as the iShares MSCI Spain Capped ETF (EWP) and the iShares MSCI Italy Capped ETF (EWI) each lost almost 2%.
iShares MSCI Europe Financials ETF
Chart Courtesy: Kimble Charting Solutions
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.