Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Banks Recent Drop May Only Be The Start

By Michael KramerStock MarketsJun 18, 2021 09:50
uk.investing.com/analysis/banks-recent-drop-may-only-be-the-start-200482000
Banks Recent Drop May Only Be The Start
By Michael Kramer   |  Jun 18, 2021 09:50
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

This article was written exclusively for Investing.com

Financial stocks have come under considerable pressure over the past week, which could be the start of something much bigger. Bond rates have fallen on the long end of the yield curve, resulting in spreads contracting. The widening spreads and rising rates helped lift bank stocks over several months; tightening spreads and sinking rates will push these stocks lower. 

Add to this recent news that JPMorgan (NYSE:JPM) and Citigroup (NYSE:C) expect second-quarter trading revenue to be weaker than in past quarters. Activity in the broader equity markets appears to have calmed dramatically over the past few months, and lighter trading volumes will not help these banks as we head into the third quarter.  

Tightening Spreads

The biggest problem for the banks is the falling interest rates on the longer-end and rising rates on the shorter end. For example, 10-year yields have fallen by more than 20 basis points since May 13, to 1.5%. Meanwhile, the 2-year yield has risen by around 6 bps to 21 bps over the same time. This has tightened the spread to 1.29% from a peak of 1.55% on May 13. 

10-2 Year Treasury Spread Daily
10-2 Year Treasury Spread Daily

As the spread compress further, it is possible the bull run in banks is over, and these stocks will decline even more. Although it may seem hard to believe, given the amount of talk around inflation and rising rates, there is a genuine possibility this happens.

The Pivot

The Fed made a significant pivot on Wednesday when their quarterly projection showed two rate hikes by 2023. The forecast showed overnight federal funds rates rising to 60 bps. That is much higher than the current 21 bps of the 2-year bill. That means that over time markets are likely to begin to anticipate rate hikes. That anticipation is what will push yields higher on the short end of the curve.  

Additionally, as long as market forces continue to stay in play and central banks like the Fed and the ECB continue to buy longer-dated bonds, rates on the long end of the curve are likely to remain contained. Also, commodity prices are falling sharply, and should the dollar strengthen further, those commodity prices will fall even more. This means the recent spike in inflation will decline, sending rates on the long end even lower. 

JP Morgan Daily
JP Morgan Daily

Technicals Breaking

The technical in the banks is suggesting there may be more pain to the downside. JPMorgan is already exhibiting several bearish trends after breaking a critical uptrend that started in late 2020. This coupled with a relative strength index that is now trending lower, suggests that the stock may have changed trends, and appears to be heading towards its next level of support, around $146. 

The trends in Citigroup are just as bad, with the same long-term uptrend now broken and a relative strength index that has reversed lower. Both indicate that Citigroup likely faces a reversal of its long-term trend, and a break below support at $68.50 may send the stock to around $63. 

Citi Daily
Citi Daily

A breakdown in the financial sector could be a big problem for the broader market if this trend persists. By the end of May, the financial sector contributed nearly 3.1% to the S&P 500 return of 12.6%, based on S&P Dow Jones Indices data. If the financials fall further, the broader index will need another sector to pick up the slack. It may fall on the shoulders of technology once again.

Banks Recent Drop May Only Be The Start
 

Related Articles

Banks Recent Drop May Only Be The Start

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (2)
Sri Kris
Sri Kris Jun 18, 2021 16:43
Saved. See Saved Items.
This comment has already been saved in your Saved Items
@Michael Kramer Dec 2019 Pre-covid the 10Y (1.9%) vs 2Y (1.57% )spread was 0.33% and the bank stocks were doing well. Now the spread is still 1.2% albeit compressed from 1.5% but still much higher than before. Why would this be a downturn?
Soy Channa
Soy Channa Jun 18, 2021 14:32
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Walletto, #88516018 for 250.0USD from 18.06.2021 20:06
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email