Stocks rallied Monday and financial services names participated in that upswing, but if coronavirus-related selling returns, it's hard to imagine the S&P 500's third-largest sector weight providing any refuge.
The reasoning is simple: as was witnessed in the latter stages of February, bond yields tumbled as market volatility spiked. Couple that with speculation that global central banks are willing to act in unison to prop up the now flailing economy and there's a recipe for net interest margin suppression (or more of it following the Fed's three interest rate cuts last year).
“Lower longer term rates and the potential for an emergency Fed rate cut in response to growing fears of economic slowdown due to the global coronavirus (COVID-19) outbreak could challenge profitability for U.S. banks into 2020 and beyond,” said Fitch Ratings in a note out Monday.
With that in mind, here are a pair of leveraged bearish exchange-traded funds to consider in policy response means lower interest rates are coming.
Direxion Daily Financial Bear 3X Shares (FAZ)
The Direxion Daily Financial Bear 3X Shares (NYSE: FAZ) looks to deliver triple the daily inverse performance of the Russell 1000 Financial Services Index and makes for an ideal tactical play on lower interest rates not only because of its significant exposure to central banks but also due to the index's almost 13% allocation to insurance providers, a group that historically favors higher interest rates.
Making FAZ particularly appealing as earnings pre-announcements and reports themselves trickle in is that some analysts believe there's little banks can do to fight off the ravages of another Fed rate cut.
“While we expect that banks will attempt to be quick in their response to cut deposit and other funding costs accordingly, these actions will not likely be to the same degree that asset yields compress, resulting in lower margins and reducing overall profitability, at least in the near term,” according to Fitch.
Direxion Daily Regional Banks Bear 3X Shares (WDRW)
Here's what a trader needs to know about the sensitivity of regional banks to interest rates: over the past month, the S&P Regional Banks Select Industry Index – WDRW's bogey – is lower by 10.22% while the S&P 500 Financial Services Index is down 8.66%.
The Direxion Daily Regional Banks Bear 3X Shares (NYSE: WDRW) looks to deliver triple the daily inverse returns of that index and the bearish ETF can be volatile as highlighted by the fact that it's up 24.14% over the past week even with a 15.43% tumble on Monday. Still, there are reasons to believe WDRW can work for short-term traders.
“A prolonged economic slowdown leading to increased company defaults and higher loss provisions, supply chain disruptions or a reduction in travel would further pressure banks, which could alter risk appetites in a search for yield, which would be viewed negatively from a credit perspective,” notes Fitch.