Tags: McCaughan | Bank | Stocks | Dangerous

Jim McCaughan: Bank Stocks Look a Little ‘Dangerous’

Friday, 06 April 2012 07:37 AM

Bank stocks have done well in recent months but that's due to Federal Reserve easing measures, and now that the Fed has hinted it's likely to back off, financial stocks may cool their rally, says Jim McCaughan, CEO of Principal Global Investors.

The Fed has suggested it is less inclined to prop up the economy via quantitative easing, under which the U.S. central bank buys assets from banks with freshly printed money to spur hiring and keep interest rates low.

The Fed has rolled out two such rounds in the past, which tend to push equity prices higher, financial stocks especially.

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"I do feel bank shares have run up too much in the first quarter and could be dangerous on the sort of scenario I'm outlining. I think the liquidity pushed them up," McCaughan tells CNBC.

"That liquidity is at least somewhat being dialed down and, therefore, the financial sector shares that have done so well in the first quarter could be quite dangerous."

Clouds may be building in Europe as well.

In Spain, turnout at a government bond auction disappointed a little recently, while yields on government bonds have been rising, a sign investors are growing uncomfortable over the country's financial health.

Without Fed liquidity injections and with troubles brewing in Europe, U.S. banks may see clouds on the horizon, or at least their stock prices will, other experts agree.

"Despite the relatively strong run we've had in the U.S., there's a number of headwinds out there, the main one being Europe," says Bernie Kavanagh, vice president portfolio management at the investment firm Stifel Financial, according to Bloomberg.

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