Financial services exchange traded funds still hang in the Federal Reserve’s balance, particularly after the May jobs report disappointed. That could mean the Fed again passes on raising interest rates later this month, which would likely weigh on financial services ETFs that have rallying in anticipation of higher rates.
With bond markets pricing in a rate hike from the Federal Reserve next month, some familiar exchange traded funds (ETFs) are starting to benefit. That includes the Financial Select Sector SPDR (NYSEArca: XLF) and the PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP), both of which have floundered this year as the Fed has held off on raising rates.
Related: 6 Bank ETFs’ Moment in the Sun
Financial services firms, like capital markets, banks and regional banks, are among the top three industries with the highest sensitivity to changes in the 10-year Treasury yield. Over the past few years, financial stocks have underperformed the broader equities market as the Fed’s robust quantitative easing program and low interest rate policy caused the yield curve to flatten – a yield curve flattens when yields on long-term debt declines more rapidly than the yield on short-term debt, which causes a smaller spread between long- and short-term debt securities.
“The Bank Index (BKX) hit its 61% Fibonacci retracement level last summer and has created a series of lower highs and lower lows. The index hit its 38% Fibonacci retracement level earlier this year and has moved higher off this key level. The index remains inside of a 5-year rising channel and is testing 1-year falling resistance,” according to Chris Kimble of Kimble Charting Solutions.[related_stories]
With a steepening yield curve, or wider spread between short- and long-term Treasuries, banks could experience improved net interest margins or improved profitability as the firms borrow short and lend long.