Falling interest rates, fears of a global economic slowdown and unrest in the Asian financial hub of Hong Kong have conspired to beat up bank stocks this month.
Financials were the worst-performing sector in the S&P 500 on Monday, down 1.9%. Among the losers were
which slid 2.7%;
Bank of America
, which fell 2.4%; and
Goldman Sachs Group
which was down 2.7%.
Bank shares held their ground until the end of July, but they started heading south on Aug. 1 after President Trump unexpectedly threatened new tariffs on China. That triggered a broad selloff and raised expectations that the Federal Reserve would keep cutting interest rates to protect U.S. economic growth.
Lower interest rates are bad for banks because they can’t make as much money from lending—although the effect can be mitigated if central-bank rate cuts stimulate economic growth.
So far, bank investors aren’t betting on a rebound. The KBW Nasdaq Bank Index has fallen 9.4% this month, compared with a drop of 3.3% in the S&P 500.
“If a [half percentage-point] cut in September were to occur it would set up the sector for a particularly weak Q4,” analysts at UBS Group AG warned in a report on Friday. They added that bank stocks could begin to look attractive again by mid-2020, if yields stopped sliding by then.
What’s even gloomier for U.S. banks is the prospect of negative yields. Banks typically stash a lot of their money in government bonds. But more than $15 trillion in government debt around the world has negative yields, meaning that buyers of those bonds are paying governments to store their money, rather than being paid. That is happening in Germany, Denmark and other European countries. Not coincidentally, shares in European banks have taken a beating over the past year.
Until recently it seemed unlikely that negative yields would take hold in the U.S. But after a big slide in Treasury yields last week, some investors are asking if it could happen here too.
Write to Alexander Osipovich at firstname.lastname@example.org
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