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‘Financial sector key to final week of trading’




As 2015 draws to a close next week, the fortunes of the last few trading days of the year may be dictated by the direction of the financial sector.

The financials have, for instance, risen more than six per cent this quarter in the U.S. markets, with investors expecting the sector to be one of the main beneficiaries of the first interest rate hike by the country’s Federal Reserve in nearly a decade last week.

However, the potential exposure of banks to the energy-dominated U.S. high-yield corporate bond markets has unnerved investors and caused financial and energy shares to stall during the two trading sessions that followed the hike. Stocks in both those sectors have been closely correlated in recent weeks.

In recent weeks, energy stocks have been tightly correlated to the price of crude at 0.95, which means they have moved in sync with each other, and financials have not been far behind. The 20-day correlation between the financial sector .SPSY and U.S. crude CLc1 is 0.75.

Should oil prices fail to stabilise and energy shares continue to fall, that could be reflected in the financials.

According to Reuters analysis, the slump in oil prices has resulted in a drop of more than 20 per cent in the energy sector this year, but while signs of stabilisation in the commodity has helped the sector to rally, it has also reduced its influence among the broader index.

According to Standard & Poor’s, as of November 30, the energy sector held a 7.1 per cent weighting in the benchmark index. In contrast, financials hold a 16.6 per cent weighting, second among the 10 major sectors and making them more influential in dictating the direction of the S&P 500.

Financials have a forward price-to-earnings ratio of 13.7, according to Thomson Reuters data, making them relatively cheap compared to the 16.5 for the broad S&P 500.

Meanwhile, as major U.S. banks have raised the rates they charge borrowers in the wake of the Fed hike, that could bump up earnings for the sector.

Even if financials manage to decouple from oil, some market participants are not expecting any outsized benefits for the sector from the change in Fed policy, which is expected to be a gradual tightening of interest rates.

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