Financial stocks account for 16 per cent of the S&P 500 in the US, and their 9 per cent slide last month is the biggest single reason the benchmark index is now 5 per cent lower than at the start of the year.
But, as The FT reports, the options market is currently suggesting a worst-case scenario of a 28% decline in financial stocks over the next three months, according to none other than Myron Scholes who currently works at Janus Capital.
Options prices have signalled similar levels of fear before, but only rarely, and only at the hottest moments of the eurozone debt crisis or US debt ceiling debacles, when a real financial crisis was on the cards.
“I cannot identify a big source of risk,” Mr Alankar told me last week, “but the market is seeing something. I worry we could be missing something.”
FT asks why do financials appear to have borne the brunt of the January selling?
One reason is the unwinding of bullish bets that were placed in the run-up to the Federal Reserve’s first interest rate rise in December. Many investors had hoped that higher rates would give banks cover to improve their net interest margin, the difference between the rate at which they borrow money (from depositors) and lend it back out again (to credit card borrowers and businesses). But with cloudier prospects for the economy, the pace of Fed rate rises now looks like it will be much slower than first hoped.
Perhaps we are. Or perhaps banks are concealing risks that are not immediately apparent from their results or their balance sheet statements.
Of course, there are other markets that have been screaming "something is wrong" since QE3 elevated stocks to levels entirely decoupled from reality...
Of course, there could be another elephant in the room reason why financials are underperforming. Because amid potential opacity of US bank balance sheets, Deustche Bank's collapse (the largest derivative book in the world) and Chinese banks illiquidity and now The BoJ's bank-earnings-crushing NIRP, perhaps there is more than just the whiff of systemic risk in the air after all.