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Bank stocks’ surge makes 2016 rate rise look more likely

Stocks

An August surge in U.S. bank shares is fuelling an emerging consensus that the economy is strong enough to allow Federal Reserve officials to raise interest rates at least once by the end of 2016.

The S&P Financial Sector rose 3.6% in August, far outperforming a 0.1% decline in the S&P 500 and making financials the best-performing sector in the index for the first month this year. A Fed interest-rate rise would deliver banks modest but long-awaited relief from profit-sapping low interest rates, which have been at the center of the industry’s long postcrisis slump.

Shares of Morgan Stanley, the biggest beneficiary of the summer rally among the largest U.S. banks, rose by 12% in August. Bank of America Corp. shares added 11% and Citigroup Inc. shares increased 9%. The financial sector also includes shares of insurers and other firms.

While major U.S. banks now are widely perceived to be less vulnerable to an economic downturn or market shock than before the financial crisis, profitability and revenue remain under pressure due to tighter capital and liquidity rules, along with slower trading and stricter lending standards.

Paul

The author Paul