The Financial Select Sector SPDR (NYSEArca: XLF) is off nearly 10% over the past month, putting the largest financial services dangerously close to correction territory while making it one of the worst-performing sector SPDR exchange traded funds to start 2016.
Contributing to the weakness in the bank sector, traders may have been unwinding bullish bets in the run-up to the Federal Reserve’s first rate hike in December, reports Stephen Foley for the Financial Times. Investors hoped that higher rates would allow banks to capitalize on wider net interest margin – the difference between deposit rates and lending rates, but the global economic uncertainty has weighed on prospects for a quick Fed rate hike schedule.
While U.S. banks have some exposure to over-leveraged oil companies, the level of exposure to the distress energy industry is not up to the scale of the U.S. housing market that triggered the 2008 run. Nevertheless, market observers are weighing on the oil outlook in the recent earnings season.
In fact, the still slumping energy sector is seen as a growing problem for bank equities and the corresponding ETFs.
“Dragged lower by falling interest rates and credit concern, the KBW Bank Index extended its three-day decline to as much as 7.5 percent earlier Wednesday — the fifth time this year a loss has exceeded 5 percent over such a stretch, data compiled by Bloomberg show. At times this week, losses from Bank of America Corp. to Citigroup Inc. have exceeded 10 percent,” reports Lu Wang for Bloomberg.
Markets may be trying to discern shapes in the shadows where there are none, overreacting to the recent spate of economic weakness. For instance, banking analyst Mike Mayo argues that Wall Street banks are trading at “recession prices but no recession.” On a price-to-tangible book value, banks have dipped to levels below pre-financial crisis, and some bank stocks are now trading below book value.
“More than $350 billion have been erased in financial shares in 2016, the worst start to a year in data going back to 1990. The selloff in Goldman Sachs Group Inc., Citigroup and Bank of America continued Wednesday, driving the industry down another 1.6 percent at 12:30 p.m. in New York. So far this year, the group has lost 13 percent, almost double the benchmark gauge’s decline,” according to Bloomberg.
Each of those stocks is held by XLF.
Financial Select Sector SPDR
