Just when it seemed that financial services stocks and exchange traded funds, such as the Financial Select Sector SPDR (NYSEArca: XLF), were gaining some momentum on increasing bets that the Federal Reserve will soon raise interest rates, other concerns about the second-largest sector weight in the S&P 500 are coming to mind.
As highlighted on ETF Trends earlier this week, some market observers are concerned U.S. banks could be hampered by the lingering weakness in their European counterparts.
The iShares MSCI Europe Financials ETF (NYSEArca: EUFN) is one of this year’s worst-performing non-leveraged sector ETFs. Market observers have warned that the ongoing monetary polices and depressed rates would weigh on banks’ bottom line as firms would find it hard to make money with a flat yield curve – banks borrow short-term and lend long-term.
SEE MORE: Another Problem for Bank ETFs
Negative interest rates in the Eurozone and in other European countries are another problem for EUFN’s holdings.
Financial shares pushed higher Friday after J.P. Morgan (NYSE: JPM), Citigroup (NYSE: C) and Wells Fargo (NYSE: WFC) revealed earnings that beat analysts’ expectations, the Wall Street Journal reports.
Despite the round of bullish earnings reports, many of the major banks found in ETFs like XLF are not looking good on a technical basis, which could be cause for near-term concern.
“In technical analysis, bad trading action on good news is bearish – as is the simple failure of an upside breakout to hold, as we’ve seen with many regional banks. Combined, these two trends do not bode well for the sector,” reports Michael Kahn for Barron’s.
SEE MORE: Financial Sector ETFs Maintain Momentum
For most of this year, bank stocks and ETFs have been responding to speculation about the Fed’s monetary policy.
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.
“Last Thursday, most banks fell in part on fears that slowing growth in China could delay the Federal Reserve’s schedule for interest-rate increases. Both the SPDR S&P Bank exchange-traded fund (KBE) and its SPDR S&P Regional Banking counterpart (KRE) completed technical failure patterns that day by falling sharply just days after moving through resistance to 2016 highs,” according to Barron’s.
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