BU S INE S SMONDAY, DECEMBER 28, 2015

NEW YORK: As 2015 draws to a close nextweek, the fortunes of the last few tradingdays of the year may be dictated by thedirection of the financial sector.

The financials have risen more than 6percent this quarter, with investors expect-ing the sector to be one of the main bene-ficiaries of the first interest rate hike by theUS Federal Reserve in nearly a decade lastweek.

However, the potential exposure ofbanks to the energy-dominated US high-yield corporate bond markets has

unnerved investors, and caused financialand energy shares to stall during the twotrading sessions that followed the hike.Stocks in both those sectors have beenclosely correlated in recent weeks.

“That trade, the oil-financials, it is goingto be with us for quite some time,” saidPeter Kenny, equity market strategist atKenny & Co LLC, in Denver.

The benchmark S&P 500 index has ral-lied nearly 3 percent this week, buoyed bya jump of nearly 5 percent in the energysector as oil prices bounced off multi-year

lows. Financial stocks, meanwhile, havesurged more than 3 percent this week.

In recent weeks, energy stocks havebeen tightly correlated to the price ofcrude at 0.95, which means they havemoved in sync with each other, and finan-cials have not been far behind. The 20-daycorrelation between the financial sectorand US crude is 0.75. Should oil prices failto stabilize and energy shares continue tofall, that could be reflected in the finan-cials.

“The influx of money and capital into

the financials over the last six monthsin anticipation of this move by the Fedwas justified, but boy, this oil tradehas turned that upside down,” Kennysaid.

IN TANDEM, FOR NOWThe slump in oil prices has resulted

in a drop of more than 20 percent inthe energy sector this year, but whilesigns of stabilization in the commodi-ty has helped the sector rally, it hasalso reduced its influence among thebroader index.

According to Standard & Poor’s, asof Nov. 30, the energy sector held a7.1 percent weighting in the bench-mark index. In contrast, financials holda 16.6 percent weighting, secondamong the 10 major sectors and mak-ing them more influential in dictatingthe direction of the S&P 500.

Financials have a forward price-to-earnings ratio of 13.7, according toThomson Reuters data, making themrelatively cheap compared to the 16.5for the broad S&P 500.

Meanwhile, as major US banks haveraised the rates they charge borrowersin the wake of the Fed hike, that couldbump up earnings for the sector. Even

if financials manage to decouple fromoil, some market participants are notexpecting any outsized benefits forthe sector from the change in Fed pol-icy, which is expected to be a gradualtightening of interest rates.

“Interest rates are going to stayhere and this trade that led people tobelieve the banks were going to besubstantially helped is just not goingto happen,” said Stephen Massocca,Chief Investment Officer, WedbushEquity Management LLC in SanFrancisco.

“They are probably fairly valuedhere and they are very disinteresting.”

With a shorter trading week aheadas well due to a holiday for NewYear’s, the economic calendar is lightand trading volume is expected to bemuted, which could result in exagger-ated moves in equities. “Due to theholiday week, attendance will belight,” said Andre Bakhos, managingdirector at Janlyn Capital LLC inBernardsville, New Jersey. “But theability to move things around is easierat times like this, so while we normal-ly think that nothing is going to hap-pen, it is easier to make things hap-pen.” — Reuters

Financial sector key to final week of tradingWALL STREET WEEK AHEAD