Financial and bank sector exchange traded funds were pummeled Tuesday as traders worried about how President Donald Trump will deliver on his campaign promises that recently fueled the market rally and a dip in Treasury yields.
On Tuesday, the Financial Select Sector SPDR (NYSEArca: XLF) fell 2.9%, SPDR S&P Bank ETF (NYSEArca: KBE) declined 4.8% and SPDR S&P Regional Banking ETF (NYSEArca: KRE) decreased 5.3%.
On the other hand, opportunistic traders capitalized on fallout through the inverse Direxion Daily Financial Bear 3X Shares (NYSEArca: FAZ), ProShares UltraPro Short Financials (NYSEArca: FINZ) and Direxion Daily Regional Banks 3x Bear Shares (NYSEArca: WDRW), which jumped 6.7%, 9.9% and 17.2%, respectively.
Less aggressive traders looked to the ProShares Short Financials ETF (NYSEArca: SEF), which takes the single inverse or -100% of financial stocks, and the ProShares UltraShort Financials (NYSEArca: SKF), which takes a leveraged -200% of financials. SEF was up 2.3% and SKF gained 4.6%.
The financial sector is getting hit by a double whammy as more are growing concerned over Trump’s ability to deliver on promises and yields on Treasury bonds pulled back.
U.S. equities have been rallying since the election on hopes and optimism that the new Trump administration would enact pro-growth policies to fuel the high-flying market valuations. However, some traders and investors are expressing concerns that the Trump trade is overbought, which makes the equities market vulnerable to quick turns.
Some are worried that House Republicans may not garner the necessary votes to replace the Affordable Care Act, or Obamacare, further fueling concerns over Trump’s ability to pass his planned tax cuts and deregulation initiatives, which have been supporting the recent bounce in the financial sector.
Moreover, a dip in 10-year Treasury yields also put additional pressure on banks as weaker yields lead to lower interest rates on loans or depressed margins. Yields on benchmark 10-year Treasuries fell to 2.436% Tuesday.
“Bank stocks moved up dramatically because of the scaling back of regulation, the 10-year Treasury yield and the economy gaining momentum,” Quincy Krosby, market strategist at Prudential Financial, told CNBC. “There are also questions from the market on whether Republicans will be able to pass its health-care plan. The success or failure could act as an indicator on whether we get tax reform.”
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