On Dec 16, yields on several U.S. sovereign bonds spiked following positive news that both the United States and China have agreed on a partial trade deal likely to be signed in the first half of January 2020. Better-than-expected economic data for the United States and China and strong possibility of Brexit within Jan 31, 2020 are the other catalysts.
Consequently, 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, stock prices of several banks surged. A hike in government bond yields will raise market interest rates 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.
Yield Curve Steepens
On Dec 16, the yield on benchmark 10-year U.S. Treasury Note increased 7 basis points to 1.89%. The yield on long-term 30-year U.S. Treasury Note gained 5.7 basis points to 2.31%. The yield on short-term 2-year U.S. Treasury Note was up 3.9 basis points to 1.643%.
Following the hike in sovereign bond yields, the S&P Financials Select Sector SPDR (XLF) rose 0.4%. Year to date, XLF is up 29.4%, surpassing the S&P 500 Index's gain of 27.3%. The SPDR S&P Regional Banking ETF (KRE), the SPDR S&P Bank ETF (KBE) and the KBW Nasdaq Bank Index (BKX) rose 0.7%, 0.7% and 0.4%, respectively, on Dec 16.
U.S-China Phase-One Trade Deal
On Dec 13, both United States and China declared that they have reached a phase-one trade deal to resolve more than a year-long trade dispute and tariff war. Per the deal, the United States will reduce the tariff rate from 15% to 7.5% on $120 billion Chinses exports. Moreover, the Trump administration will also cancel imposition of 15% tariff on fresh $160 billion Chinese products mainly used for making consumer goods.
On the other hand, China has pledged to purchase $40 billion agricultural products from the United States per year. U.S. officials are still trying to raise the threshold to $50 billion per annum. Moreover, China will also rollback on some tariffs imposed on U.S. exports. U.S. Trade Representative Robert Lighthizer said the deal will address intellectual-property issues along with strong enforcement provisions and financial services and currency issues.
Solid Economic Data
The National Association of Home Builders’ monthly confidence index increased five points to 76 in December from an upwardly-revised 71 in November. December’s figure represents the highest index reading since June 1999. Any reading above 50 indicates improved confidence among homebuilders.
The IHS Markit Flash U.S. Composite PMI Output Index grew to 52.2 in December from 52 in November. The December index was the highest in five months. Services Business Activity Index was 52.2 in December compared with 51.6 in the prior month. U.S. Manufacturing PMI was 52.5 in December compared with 52.6 in November.
The National Bureau of Statistics of China reported that the country’s value-added industrial output grew 6.2% year over year in November compared with 4.7% in October. Moreover, China’s retail sales jumped 8% year over year in November compared with 7.2% in October.
Possibility of Brexit Soon
On Dec 12, British prime minister Boris Johnson and his Conservative Party had a landslide victory in the recently concluded general election in the U.K. Notably, Boris Johnson is a major supporter of Brexit and that was his main election issue. Johnson is likely to add a revision to the Brexit bill that will prevent any extension to the transition period beyond December 2020. The U.K. is scheduled to leave the European Union by Jan 31, 2020.
Our Top Picks
At this stage, it will be prudent to invest in banking stocks with a favorable Zacks Rank and strong growth potential. We have narrowed down our search to five such stocks, which have popped in 2019 and have strong upside left for 2020. Each of our picks carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The chart below shows price performance of our five picks year to date.
The Bancorp Inc. (TBBK - Free Report) offers a range of deposit products and services, including checking, savings, money market, commercial and retirement accounts. The company has expected earnings growth of 10.1% for next year. The Zacks Consensus Estimate for next year has improved by 20% over the past 60 days. The stock has jumped 61.1% year to date.
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. The company has an expected earnings growth rate of 11.8% for next year. The Zacks Consensus Estimate for next year improved by 10.3% over the past 60 days. The stock has soared 32.7% year to date.
Customers Bancorp Inc. (CUBI - Free Report) provides financial products and services to small and middle market businesses, not-for-profits, and consumers. It operates in two segments, Customers Bank Business Banking and BankMobile. The company has an expected earnings growth rate of 47.2% for next year. The Zacks Consensus Estimate for next year improved by 12.7% over the past 60 days. The stock has soared 31.7% year to date.
State Street Corp. (STT - Free Report) provides a range of financial products and services for institutional investors worldwide through its subsidiaries. The company has an expected earnings growth rate of 10.6% for next year. The Zacks Consensus Estimate for next year improved by 6.1% over the past 60 days. The stock has surged 26.3% year to date.
Luther Burbank Corp. (LBC - Free Report) offers commercial banking products and services to real estate investors, entrepreneurs, high net worth individuals and commercial businesses. The company has an expected earnings growth rate of 11.2% for next year. The Zacks Consensus Estimate for next year improved by 8.8% over the past 60 days. The stock has surged 25.8% year to date.
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