Bank stocks and financial sector exchange traded funds were the biggest losers in U.S. markets as traders weighed the potential years of uncertainty in response to the passing “Brexit” referendum.
Recent weakness in the financial services sector, the second-largest sector weight in the S&P 500, may not be an invitation to embrace the group. At least not right now.
ETFs such as the Financial Select Sector SPDR (NYSEArca: XLF), iShares U.S. Financials ETF (NYSEArca: IYF) and the Vanguard Financials ETF (NYSEArca: VFH) have been under pressure following the Brexit outcome, but there are other factors at play, including the Federal Reserve’s refusal to raise interest rates to this point in 2016.
Related: Financial Sector ETFs Plunge on Brexit Contagion
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.[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.