Financial stocks and sector-related exchange traded funds were among the worst performing areas of the U.S. markets as investors continued to digest the consequence of the United Kingdom separating from the European Union and the potentially extended low interest-rate environment out of the Federal Reserve.
On Monday, the Financial Select Sector SPDR (NYSEArca: XLF) fell 2.7%, iShares U.S. Financials ETF (NYSEArca: IYF) dropped 2.2% and Vanguard Financials ETF (NYSEArca: VFH) decreased 2.6%. The financial sector was also the worst performing area Friday following the Brexit results.
Banks and the broader financial sector retreated Monday as investors speculated on the global economic uncertainty caused by Britain’s decision to break away from the E.U. Traders were worried that the Federal Reserve may hold off on raising its benchmark interest rates in light of the Brexit uncertainty, reports Alex Veiga for the Associated Press.
“A lot of the expectations about what these financial stocks would be worth have changed,” JJ Kinahan, chief strategist at TD Ameritrade, told the AP. “This sort of takes Fed rate raises off the table for a while, maybe through the end of 2016.”[related_stories]
Investors previously expected the Fed to increase interest rates at least twice this year, which would help bolster banks’ revenue from loans and credit cards.
Futures traders now see a 22% chance the Fed will cut borrowing costs by year-end, Bloomberg reports.
The financial sector, though, may still look forward to one piece of good news this week as the Federal Reserve is set to release the results of its annual stress test on large U.S. banks. Analysts argue that the results could reassure investors worried about U.S. banks’ exposure to the Brexit.
“This is a real-world test that can help demonstrate the greater resiliency of banks’ balance sheets and the benefits of de-risking that, while having hurt revenue this decade, should help incrementally in times such as this and show the relative strength of U.S. banks,” CLSA bank analyst Mike Mayo, told Reuters.
For more information on the Brexit fallout, visit our Brexit category.
Financial Select Sector SPDR