Bond sell-off boosts bank stocks

Bank stocks rose across Europe and North America on Wednesday, with UK banks hitting their strongest level in almost four years and US groups at their highest point since before the financial crisis, as investors grow increasingly confident that the era of ultra-low interest rates is approaching its end.

Royal Bank of Scotland, Standard Chartered and HSBC were the three largest risers on the FTSE 100 index, climbing 4.4 per cent, 4.1 per cent and 3.7 per cent respectively. That helped push the FTSE 350 Banks Index up 2.7 per cent to its highest level since May 2014.

Investors were similarly optimistic about banks in the eurozone, with the Euro Stoxx Banks Index rising 2.5 per cent.

US stocks made slightly slower gains, but a 1.1 per cent increase in the KBW Bank Index came in the face of a weak wider market. The index is now at its highest level since August 2007.

Global bond yields have been rising this week amid speculation that the Bank of Japan will join its Eurozone and US peers in scaling back its stimulus programme this year.

A move toward higher rates would be good news for banks, which have suffered over the last decade as historically low interest rates have weighed on their margins.

Gary Paulin, head of global equities at Northern Trust, also pointed to reports that Chinese authorities increasingly viewed US government bonds as less attractive.

Mr Paulin said:

They have the largest foreign reserves in the world. And if they are pulling back along with pension funds …and Central banks continue to taper, one might logically conclude rates are likely to be going up. One might then ask …’got banks?’

This week’s moves come after US tax reform efforts had already increased optimism about the banking sector, with a number of analysts upgrading their earnings forecasts for American banks in particular.

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Analysts at UBS noted today that “as we move into 2018, sentiment towards global banks has improved notably in developed markets …fundamentally, US tax reform has boosted expectations of stronger growth and higher rates in the US, with potential spill-over growth benefits elsewhere”.