On May 16, yields on several U.S. sovereign bonds spiked following positive development on U.S.-China trade war front and better-than-expected performance by U.S. corporates in the third quarter of 2019. Moreover, the U.K. parliament has forced prime minister Boris Johnson to ask for an extension of the Brexit deadline. Investors dumped safe-haven government bonds and opted for risky assets like equities, which resulted in a Wall Street rally.
As a result of these developments, the stock prices of several banks surged. A hike in government bond yield will raise the cost of funds, which in turn will enable the financial sector, especially banks, to widen the spread between longer-term assets, such as loans, with shorter-term liabilities, thus boosting the sector’s profits.
U.S. Government Bond Yields Surge
On Oct 21, the yield on benchmark 10-year U.S. Treasury Note increased 4.7 basis points to 1.794%, the highest in four weeks. The yield on long-term 30-year U.S. Treasury Note gained 4.3 basis points to 2.286%, the highest since Sep 16. Moreover, the yield on short-term 2-year U.S. Treasury Note was up 4.1 basis points to 1.615%.
Following the hike in sovereign bond yields, S&P Financials Select Sector SPDR (XLF) rose 1.4%. Year to date, XLF is up 17.3%. Moreover, the SPDR S&P Regional Banking ETF (KRE), the SPDR S&P Bank ETF (KBE) and the KBW Nasdaq Bank Index (BKX) gained 1.3%, 1.4% and 1.8%, respectively, on Oct 21.
Positive Development on Trade War Front
As per a Bloomberg report, on Oct 18, Chinese vice premier said, “China and the U.S. have made substantial progress in many aspects, and laid an important foundation for a phase one trade agreement.” On Oct 21, President Donald Trump said efforts to end a U.S. trade war with China were going well as the first phase of the trade deal is likely to be signed in the middle of next month.
U.S. Trade Representative Robert Lighthizer told reporters that White House is aiming to finalize the first phase of the deal at the Asia-Pacific Economic Cooperation meetings in Chile on Nov. 16 and 17, where the two presidents are supposed to meet.
White House economic adviser Larry Kudlow said that the Trump administration could withdraw its proposed 15% tariff on $160 billion of Chinese goods effective Dec 15, if negotiations continue to go well.
Brexit Likely to be Delayed Further
On Oct 19, after a majority voting, the U.K. parliament has forced prime minister Boris Johnson to ask the European Union for a three-month extension to the Oct. 31 deadline to exit from the trade bloc. The prime minister’s effort to seek another trust vote in parliament on Oct 21 was thwarted by the U.K. House of Commons Speaker John Bercow, who declared that a new vote “would be repetitive and disorderly.”
Consequently, Boris Johnson’s attempt to quit EU even with no deal by Oct 31 was denied by British lawmakers. Several industry researchers have warned that such as situation will have severe negative impact on the global economy and financial markets.
Our Top Picks
At this stage, it will be prudent to invest in banking stocks with favorable Zacks Rank ----Zacks Rank #1 (Strong Buy) or 2 (Buy) ---- and strong growth potential. We have narrowed down our search to five stocks, which have popped in the past three months and still have upside left. You can see the complete list of today’s Zacks #1 Rank stocks here.
First Business Financial Services Inc. (FBIZ - Free Report) provides commercial banking products and services for small and medium-sized businesses, business owners, business executives, professionals and high net worth individuals.
The company has expected earnings growth rate of 36.6% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.4% over the last 60 days. This Zacks Rank #1 stock has jumped 14.9% in the past three months.
Hilltop Holdings Inc. (HTH - Free Report) offers a wide range of financial products and services in the United States. It operates in four segments: Banking, Broker-Dealer, Mortgage Origination, and Insurance.
The company has an expected earnings growth rate of 50.8% for the current year. The Zacks Consensus Estimate for the current year has improved by 2.1% over the last 60 days. This Zacks Rank #1 stock has surged 12.1% in the past three months.
Reliant Bancorp Inc. (RBNC - Free Report) operates as a financial holding company providing a range of commercial banking services for businesses and individuals in the United States. It operates in two segments: Retail Banking and Residential Mortgage Banking.
The company has an expected earnings growth rate of 8.8% for the current year. The Zacks Consensus Estimate for the current year has improved by 2.1% over the last 60 days. This Zacks Rank #1 stock has gained 3% in the past three months.
Eagle Bancorp Montana Inc. (EBMT - Free Report) operates as the bank holding company for Opportunity Bank of Montana offering various retail banking products and services in Montana. It serves checking, savings, money market, and individual retirement accounts, as well as certificates of deposit accounts.
The company has an expected earnings growth rate of 67.3% for the current year. The Zacks Consensus Estimate for the current year has improved by 1.1% over the last 60 days. This Zacks Rank #2 stock has soared 12.3% in the past three months.
First Financial Bankshares Inc. (FFIN - Free Report) provides commercial banking products and services primarily in Texas. It accepts checking, savings, and time deposits; and offers real estate, commercial, agricultural, and consumer loans to businesses, professionals, individuals, and farm and ranch operations.
The company has expected earnings growth rate of 11% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.8% over the last 60 days. This Zacks Rank #2 stock has climbed 12.6% in the past three months.
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