European banks’ vulnerability could spill over to the US

The big banks' earnings statements are off to a positive start.

Bank of America on Monday beat analyst expectations as did JP Morgan, Citigroup and Wells Fargo last week.

But as Britain's exit from the European Union looms and may have ripple effects in the U.S., some analysts say the good times for U.S. banks may soon end.

Larry McDonald, head of U.S. macro strategy at ACG Analytics and editor of investment newsletter "The Bear Traps Report," told CNBC in an e-mail on Friday that banks saw a "decent" third quarter in part because expectations of rising rates are pushing yield curves higher; but this upbeat start may not necessarily point to longer-term positivity. McDonald looks to Europe, where he says the banking crisis is a bigger catalyst than quarter over quarter earnings for big U.S. banks.

"Ultimately we would not be surprised if some of this earnings growth continues, but that is not the broader story," McDonald wrote. "In terms of share price, these stocks will be a lot more concerned with what is going on in Europe. Once we return to a toxic DB [Deutsche Bank] atmosphere that was prevalent just a few weeks ago, US financials will drop."

The U.S. Justice Department in September fined Deutsche Bank $14 billion in a settlement over the sale of mortgage bonds before the financial crisis. On Friday it was reported that the German government would not support the bank, the country's largest, if it were to issue new stock.

And while expectations for third quarter earnings may not have held the highest bar, banks have seen growth in trading revenues and have beat expectations in part for this reason, Erin Gibbs, equity chief investment officer at S&P Global, said Friday on CNBC's "Trading Nation." Investors are in fact trading more and changing their portfolios, Gibbs said.

"This could continue. If we keep seeing volatility, if we keep seeing rate hikes, if we keep seeing investors changing their portfolios, it could get better," Gibbs added.

"Estimates are expected to be higher for next quarter. We're looking for five and a half percent growth – no contractions for the fourth quarter – and even 8 percent growth for 2017, so they are going to have some higher hurdles headed forward."

Goldman Sachs reports its earnings Tuesday and Morgan Stanley reports Wednesday.


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Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's Closing Bell (M-F, 3PM-5PM ET). In addition, he contributes to CNBC and CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

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