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Bleak Margin Outlook Boost Case For Bearish Bank ETF

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Bleak Margin Outlook Boost Case For Bearish Bank ETF

Bank earnings start rolling in this week and has been widely noted, net interest margins are expected to come under pressure due to low interest rates.

What Happened

In an effort to prop up the economy against the coronavirus backdrop, the Federal Reserve took interest rates to historic lows earlier this year, providing a big headwind for the spreads at which banks earn interest on loans made and one the interest they pay out to depositors.

This troubling scenario has some traders looking at the Direxion Daily Financial Bear 3X Shares (NYSE: FAZ) ahead of bank earnings season. FAZ tries to deliver triple the daily inverse performance of the Russell 1000 Financial Services Index.

Why It's Important

With rates near zero, it makes sense that traders are evaluating FAZ and that could pay off.

“Excess liquidity could weigh on bank margins in the second quarter, particularly since most banks don't necessarily want to reinvest that liquidity into the bond market,” said Nathan Race, an analyst with Piper Sandler Cos., in an interview, with S&P Global Market Intelligence.

A couple of other factors bode well for FAZ this earnings season. First, large money center banks aren't vulnerable to the net interest margin issue. In fact, unless those companies offset margin suppression with higher trading or deal-making volume, FAZ will look all the more compelling this earnings season.

Second, insurance companies represent 12.41% of the Russell 1000 Financial Services Index. Not only are those firms being hit by low interest rates, they are vulnerable to the COVID-19 pandemic because they are confronted with large payouts, some of which are being contested in court.

What's Next

Another catalyst for FAZ could be banks talking about larger-than-expected reserves for projected credit losses.
“Although some industries are expected to have issues, such as restaurants, travel and hotels, Christopher McGratty, a bank analyst at Keefe Bruyette & Woods said the credit quality issues could affect several industries, highlighting energy lending as another area of concern for banks,” according to S&P Global Market Intelligence. “Race pointed to commercial real estate, particularly in the retail category, as an area that may also be hit hard by the pandemic. Analysts will be considering the results of forbearance and deferrals on banks' credit profiles.”

 

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Posted-In: DirxionEarnings News Sector ETFs Short Ideas Trading Ideas ETFs

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