The Financial Services Select Sector SPDR (NYSEArca: XLF) is up more than 2% over the past month after gaining 1% last Friday on volume that was more than 50% above the daily average as traders increase wagers that the October jobs report will prompt the Federal reserve to boost interest rates following its December meeting.
Previously, the Federal Reserve’s decision to hold off on an interest rate hike, ongoing economic weakness and concerns over trading revenues have weighed on the financial sector’s outlook.
While the sector has lagged the broader market in recent weeks and earnings estimates have turned lower, financial firms are still expected to show earnings growth of 8.4%, falling behind only telecoms and consumer discretionary companies in expected growth for the quarter, reports Chuck Mikolajczak for Reuters.
Nevertheless, the earnings projects are still lower than the 14.8% expected at the start of the quarter and 17.8% growth at the start of the year. Banks have seen estimates steadily fall over the past 30 days. However, investors late to the bank stock and ETF party might be disappointed if they jump in right now.
“Yet with shares of many of the biggest banks now up 9% to 10% from a month ago, investors probably shouldn’t expect to see much more of a lift. Shares of Bank of America, considered by many to be the ‘purest’ interest-rate bet, are up 14%. If anything, the risk is that interest rates prove less buoyant than expected, holding back bank earnings,” reports John Carney for the Wall Street Journal.
“One immediate impact of the failure to raise interest rates is that it caused the value of bank assets to rise and it improved real book values. This is because an estimated 92 percent of bank assets are financial instruments. If interest rates remain stable or decline slightly, the value of these assets rises in real terms. This improves banking industry book value,” said Dick Bove of Rafferty Capital Markets in a note cited by Jeff Cox of CNBC.
And when it comes to higher interest rates bolstering financial services ETFs such as XLF, the good news is that the number of traders betting that the Fed will boost borrowing costs following its December meeting has climbed in recent days. Options traders are buying into the notion of higher rates benefiting bank stocks.
“It’s that a single rate increase isn’t likely to deliver sharply better results for banks. At best, moving the overnight target rate a quarter of a percentage point higher could put an end to the deterioration of net interest margins that has afflicted banks for several years now,” adds the Journal.
Financial Services Select Sector SPDR
