Why Banks Rallied on February 12 but Could Not Offset Weekly Losses

Weekly performance of the financial sector

Market sentiments turned positive on Friday, February 12, after five consecutive days of losses, indicating that investors might be easing up their bearish outlook. The S&P500 Index (SPY), for example, gained by 2%, led by gains in financial sector stocks. For the week, however, markets closed in the red, losing 0.7%.

The Financial Select Sector SPDR ETF (XLF) gained by 4.1% on Friday, driven by gains from J.P. Morgan & Chase (JPM), Citigroup (C), and Regions Financial (RF). These stocks gained by 8.3%, 7.3%, and 7.1%, respectively, on the day. This rebound in banks was followed by news of J.P. Morgan CEO Jamie Dimon buying $26.6 million of his company’s shares. Deutsche Bank (DB) also gained by 8% on Friday after news that the company would buy back $5.4 billion worth of senior unsecured debt, relieving investors who were nervous about the bank’s ability to pay coupons on its contingent convertible bonds.

Why Banks Rallied on February 12 but Could Not Offset Weekly Losses

Worldwide weakness?

Weakness in the financial sector is being witnessed across the globe. Fourth quarter bank earnings have been dismal, and a low margin outlook along with falling commodity prices have led to further worries of credit losses across the sector. Further, Fed Chair Janet Yellen has indicated that the Fed would put off from its plan of hiking interest rates in 2016 if current market conditions prevail, leaving open the possibility of a negative interest rate policy. Lower long-term interest rates, of course, would reduce the earning power of banks, and the Financial Select Sector SPDR ETF (XLF), which serves as a barometer for US financial stocks, has already plunged by 15% in 2016 so far.

XLF closed at $20.49 on Friday, February 12, recording losses of 2.2% for the week. The Vanguard Financials ETF (VFH) and the iShares Financials ETF (IYF) generated returns of -2.4% and -2.2% during the week. Comparatively, the broad markets represented by the S&P 500 SPDR ETF (SPY) returned -0.7% during the same period.

Stocks like HCP, Genworth Financial (GNW), and Assurant (AIZ) lost 26.2%, 22%, and 14.5%, respectively, last week. Meanwhile, the big gainers for the week were stocks like Realty Income, Nasdaq, and CME Group, whose stocks gained by 8.2%, 3.2%, and 2.9%, respectively, during the week ending February 12.

Now let’s get even more specific with the performance of XLF’s holdings last week.