Regional bank stocks and exchange traded funds have recently been moving higher on speculation that the Federal Reserve is nearing its first interest rate hike of 2016, but that rally could be facing some important near-term technical resistance. The SPDR S&P Regional Banking ETF (NYSEArca: KRE) is the largest, most heavily traded regional bank ETF.
KRE has been thirsting for higher interest rates. The same goes for rivals such as the iShares U.S. Regional Banks ETF (NYSEArca: IAT) and PowerShares KBW Regional Bank Portfolio (NYSEArca: KBWR), which both include greater tilts toward smaller banks.
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.
“The KBW Regional Bank Index (KRX) has in the past few days finally managed to surmount the highs reached several times from late May through early August. That said, the coast may not totally be clear for the KRX. That’s because if we scroll back 5 years, we see that the regional bank index is bumping into the underside of the Up trendline stemming from the late 2011 lows,” according to See It Market.[related_stories]
A rising interest rate environment will throw a wrench into the financial markets. Nevertheless, bank-related exchange traded funds could weather the storm as financial firms have positioned ahead of the potential rate changes. KRE’s sensitivity to interest rates is well known.
An improving U.S. economy could foster increased borrowing and financing by businesses, large and small, across the U.S. while benign mortgage rates could also provide a lift to the mortgage lending operations of regional banks.
“If KRX prices are able to reclaim the top of the post-2011 trendline, then not only is more upside opened up immediately in the sector, but it may be a vote of confidence for a continued hawkish tone out of the Fed. If the index is rejected here, then not only is further upside in financial shares going to be a challenge, but the interest rate pendulum may again swing back to the doves,” adds See It Market.
For more information on Bank ETFs, visit our Banks category.
SPDR S&P Regional Banking ETF