Eoin Treacy's view
Bank sector indices - Bull markets thrive on liquidity. Therefore liquidity providers should do well as demand for capital increases. We tend to keep a close eye on the performance of banking sectors because they are so often leaders. The current situation is complicated somewhat because the banking sector was at the epicentre of the credit crisis and is therefore less likely on aggregate to be a leader in the current cycle.

The S&P500 Banks Index hit an important low in March 2009 and has been in a tight range since August of that year. The Philadelphia Banks Index has a similar pattern. In fact the FTSE-350 Banks Index, the Europe Stoxx Banks Index, the Swiss Banks Index, the Australian Financials Index, the Korean Financial Industry Index, the Singapore Financials Index and the Hang Seng Financials Index have all been ranging for more than a year. Interestingly, while the KBW Regional Banks Index also remains rangebound it has a posted clearly discernable upward bias over the last 18 months.

The Euro Stoxx Banks Index and the FTSE Xinhua China A600 Banks Index have had more of a downward bias. The Topix Banks Index has been the worst performer.

Of the above sectors the Asian indices (ex Japan and China) rallied much more impressively from their lows and despite some recent underperformance have performed more or less in line with their respective markets. Countries well divorced from the financial excesses that were the hallmark of the pre crisis era and subsequently offer exposure to the Asian led growth story are clearly outperforming. Among these are the Canadian, Indonesian, Thai, Indian and Taiwanese banking sectors. To date, these indices have been reasonably reliable lead indicators for their respective markets and are likely to remain important bellwethers for as long as the current bull market remains in motion.

Most bank indices have come under pressure over the last few weeks and those which are rangebound will have to find support relatively quickly if the 18-month status quo is remain in place. The potential for a reactionary phase for a number of stock markets to deepen remains a realistic possibility.


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