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 Bank shares on the S&P 500 rose 3.7 percent on Wednesday, the most
since April 13, as investors view higher interest rates as a boost
to earnings. The 17 components of the S&P bank index rose between
2.2 and 6.0 percent, with gains of near 5 percent in both Citigroup
Inc and Bank of America Corp among the biggest boosts.
"They need other parts of the business to pick up but at the very
core it is about interest rates," said Quincy Krosby, market
strategist at Prudential Financial in Newark, New Jersey.
Whether the rally proves to be more than a one-day event, though,
hinges on the delivery of sufficiently hawkish follow-up commentary
from top Fed officials in the days ahead.
On Wednesday, minutes from the Fed's meeting last month showed Fed
officials felt the U.S. economy could be ready for an interest rate
increase in June.
Markets had earlier priced in one interest rate hike from the Fed
late this year, but this week's U.S. inflation data, and recent
comments from several Fed policymakers, alongside the minutes, have
now all led analysts to see monetary policy tightening soon.
Bill Gross, the portfolio manager at Janus Capital Group Inc,
tweeted after the Fed minutes: “So the Fed sort of gets it. Low
rates destroy business models and sap economic potential.” Gross has
been warning that low short-term interest rates are depressing bank
margins.
A more hawkish Fed could whet investor appetite in an industry that
has not been favored this year and is down 7.8 percent since Dec.
31, compared with a flat S&P 500.
Confirmation of the hawkish stance could come on Thursday as Fed
Vice Chair Stanley Fischer and New York Fed President William Dudley
speak in separate events. Fed Chair Janet Yellen's next scheduled
public appearance is on May 27.
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For now, the Fed’s posture has resulted in a "one-day gift" for financial
shares, said Bucky Hellwig, senior vice president at BB&T Wealth Management in
Birmingham, Alabama.
"Positions were squared, some buyers were drawn in, shorts were covered,"
Hellwig said. "Now, for it to be sustainable, the consensus has to grow that the
Fed is indeed going to raise rates in June and then raise it a second time this
year."
Investors could also be attracted by the sale price tag in bank stocks.
Valuations on the S&P 500 bank index were last month at their cheapest relative
to the overall index in more than 10 years, according to DataStream data.
(Additional reporting by Jennifer Ablan and Lewis Krauskopf in New York; Editing
by Matthew Lewis)
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